2016 overview and 2017 forecast | Brisbane and Gold Coast commercial and residential sectors
Tom Barr, National Director of Capital Markets
In 2016 we have seen an increasing buy-side capital demand, particularly from offshore capital, fuelled largely by the substantial yield arbitrage available between Brisbane, Sydney and Melbourne. Domestic asset managers have been increasingly active in the market representing offshore capital mandates, as the listed A-REIT’s have found it difficult to compete due to their required hurdle rates of return.
In 2016, our team has received over 85 per cent of bids from offshore parties for the sale campaigns of 41 George Street and Green Square, with the origin of offshore capital on these campaigns emanating from Singapore, USA, Korea and Germany.
Only three major office investments have traded thus far in the core CBD in 2016. The lack of on market core CBD office opportunities has seen investors turn their attention to quality large scale assets outside the traditional CBD grid. We have seen that with the sales of 100 Skyring Terrace Newstead (50% interest), ATO Upper Mount Gravatt, and the pending sale of Green Square Fortitude Valley.
Record high vacancy rates in Brisbane have resulted in a two-tiered leasing and capital market, as tenants and buyers continue to be focused on the prime-grade end of the market. However with forecasts showing an improving leasing market over the next couple of years, we anticipate an increasing number of buyers willing to go up the risk curve and make counter cyclical plays in the secondary-grade CBD market. We have seen this beginning to emerge, with the transactions of 333 Adelaide Street and 444 Queen Street (66% interest) in 2016.
Given the backdrop of limited supply and unprecedented buy-side capital demand, in 2017 we anticipate market yields will continue to tighten and are expected to breach 5.5 per cent in the core CBD market. Buy-side capital demand will continue to be dominated by offshore groups
We anticipate an increase in the number of owners wanting to capitalise on the unprecedented strength of buy-side capital demand from offshore, and divest out of their investments. The demand from offshore groups will strengthen further in 2017.
Given the heightened geo-political and macro-economic situation globally, and a surprising outcome in the US presidential election, we foresee an increasing number of transactions will be driven by a motivation to repatriate offshore capital back to select origins. We have already seen this begin to emerge with a number of transactions being driven by repatriation of Malaysian capital.
Hunter Higgins, Director of Investment Services
In the Brisbane metro market there has been a noticeable change in the demand shift from residential development sites to quality investment stock. With this change in direction, we have also experienced a significant lift in student accommodation and aged care facility developments.
Developers are focusing on investment grade stock with value add potential, and investors are very active in the market due to low interest rates and volatile stock market.
Distinct lack of quality stock has created competitive tension between prospective purchasers, which has ultimately reflected in sharper yields and increased end sale prices. We have also had a significant increase in auction success with 87.5% of properties transacted via auction.
In 2017 we are likely to see a noticeable change in site values due to supply, and the yields for quality stock will continue to remain robust. We are already experiencing significant inbound capital from offshore, investors are now starting to focus on Queensland, due to excessive yields in Sydney and Melbourne.
Demand will remain strong for the CBD and immediate fringe quality blue chip and premium assets such as fast food, service stations, neighbourhood retail and shopping centres. Any value add opportunities with quality national and multinational tenants are favoured.
In Brisbane we are also seeing Asian buyers channeling capital into quality assets. According to CityScope, 43 out of the 137 strata-titled ground floor retail units in the Brisbane City are under Asian ownership.
Mark McCann, National Director of Office Leasing
Brisbane office leasing market outperformed many expectations in 2016. We experienced positive absorption and return of general business sentiment and confidence in the macro economy. Significant volume of leasing transactions from the Queensland State Government in the CBD and Metro regions provided much needed relief and stabilisation of the vacancy rates in both markets. This was also a year for completion of three major CBD projects: 180 Ann Street, 480 Queen St and the Qld State Government office tower at 1 William Street – a combined total in excess of 185,000sqm.
In 2017 we are expecting a positive absorption of space to continue across all asset grades. Corporate businesses will continue to leverage off the favourable commercial market in order to reduce their corporate footprint by way of smarter and more efficient fitout design. The emergence of ‘co working’ operators and growth of the education sector will continue to stabilise and positively impact on the overall vacancy in the market.
The new supply pipeline in the CBD will be constrained from 2017 to 2019. Apart from existing additions such as 310 Ann Street, there is only one development in the CBD which will be completed around the beginning of 2019. This cap on new development supply and limited existing additions, will help in reducing the overall vacancy from record levels to more historic 10 year averages.
Healthcare & Retirement Living
Chris O’Driscoll, Associate Director of Healthcare & Retirement Living Transactions
In 2016 we have witnessed an increase in volume of ventures between sports and services clubs and retirement and aged care groups. Such ventures are likely to continue in 2017 as there are a range of benefits for both the club and the operator, some including: cash injection to the club; ability for operator to leverage off existing infrastructure and amenities; both club and operator benefit from existing members and incoming residents; and improved club facilities.
Brisbane City Council is currently offering incentives for these type of developments, with a particular focus toward clubs. Incentives include 33 per cent reduction to infrastructure charges and an additional two storeys allowance for medium to high density locations.
Land in South East Queensland is in high demand for all property asset types across the healthcare sector including: retirement villages, manufactured housing estates/land leased estates, aged care, private hospitals and medical precincts.
We are seeing sharpening discount rates and yields for operating retirement and manufactured housing estates following the deregulation of homecare.
Neil Scanlan, National Director of Hotel Transactions
In 2016 strong leisure markets lead to an increase in purchaser interest in Cairns and the Gold Coast. Brisbane market transactions were very quiet as the market understands the effect of new supply additions.
In 2017 the leisure markets will continue to strengthen, however they will still be below replacement value ensuring no new addition to supply occurs. Brisbane is to remain tightly held as supply/demand curve stabilises. We are likely to see demand from existing hotel investors, with hot spots being the Gold Coast and Tropical North Queensland.
Kym Thrift, Director, Retail Leasing
In 2016 we have seen a pickup in activity in Brisbane from big restaurateurs, such as Fink Group who opened Otto at 480 Queen Street. General feedback from these sophisticated restaurant groups is their confidence about Brisbane’s growth and changing culture. They are changing their mindsets about our demographics due to the planned development and strong tourism numbers.
Majority of the leasing deals done by Colliers this year were around casual dining and quick service food. Food sector is very much on the increase and there is very little activity from fast fashion groups. However the market is responding very well to international fashion brands such as H&M and Zara.
In 2017 many more entrants and brands will be announced on the back of continued development surge within the inner city ring. This rapid growth, more than the state’s average, is creating more demand which is directly impacting the retailers’ performance. We are currently talking to a number of luxury brands that are not yet in Brisbane who are actively looking to secure sites for 2018. Total estimated expenditure for the CBD is $3.85 billion per annum for main trade area and it is growing. Brisbane has also experienced 3 per cent tourism growth year on year.
We see demand coming from well-established local operators and sophisticated restaurants from Sydney and Melbourne looking to take advantage of our urban renewal and growth. The hotspots will continue to be Fortitude Valley and Newstead due to the level of development that is happening in the area, with potentially 11,980 new apartments coming online over the next 3 years.
The population growth in this inner city region is at 8.5 per cent per annum, almost five times the growth of the Brisbane average at 1.8 per cent. Retail spending is also growing by 9 per cent annually, with casual dining spend levels at 88 per cent higher than the Brisbane average. Ideal retail leasing opportunities in these locations are TC Beirne building refurbishment and Gasworks Stage 3, which is currently under construction.
Stewart Gilchrist, National Director of Retail Investments
Neighbourhood shopping centres in South East Queensland are in limited supply with existing owners reluctant to sell unless there are alternative projects in which they can invest in. In the property cycle terms we have been in the 9 to 11 o’clock period for quite some time.
In excess of 90 per cent of retail centres are being sold to local investors such as wealthy private individuals, syndicator groups, superannuation funds and smaller local institutional investors. They are all simply chasing high yields with security.
Yields have tightened approximately 0.5% pa over the past 2 years. Despite many experts stating that the market has topped out, we are continually experiencing record low yields as new centres come onto the market.
Looking forward, there are very few new shopping centres being developed and there is a huge volume of unsatisfied demand. With a combination of a long term, low interest rate cycle, and considerably higher yields than those being achieved overseas, we are likely to continue to experience record sale prices for quite some time.
Andrew Scriven, Director of Residential
The residential apartment market in Brisbane is forecast to continue its current momentum in 2017, with sales expecting to continue to track 40%-50% above roughly the long term 5 year average. A number of projects have been mooted or deferred which will also help the perceived over supply in the market place. Brisbane is on a flight to quality as owner occupier demand for large apartments in boutique projects is expected to persist.
Land / Townhouse Sales
The house and land market continues to perform strongly in SEQ. Limited supply, strong first home buyer and owner occupier activity combined with a renewed interest from investors has contributed to strong sales rates on most projects throughout Brisbane, the Gold and Sunshine Coasts. Price growth over the last 12 months has been circa 10% on average with further growth expected as supply tightens.
The mid to outer ring medium density market in Brisbane is performing well as buyers unable to afford traditional house and land compromise with well-designed but more affordable townhouses in established suburbs.
Development Site Sales
It is expected that demand for development sites will steady as 2016 saw a shift in focus for most developers, moving away from the inner Brisbane apartment market with increasing demand for infill and greenfield sites to accommodate to the current market. It is expected that apartment supply will soften in 2017 which will allow for absorption of current stock.
Rural & Agribusiness
Rawdon Briggs, National Director, Rural & Agribusiness
This year we have seen a significant increase in the number and size of agribusiness transactions occurring in Northern Australia. Even after the lift in values our farming and grazing land is still significantly cheaper than all of the first tier global agricultural investment destinations such as USA, Canada, UK and Europe.
In 2017 we expect the total number of transactions to slow down slightly in line with a probable Australian interest rate rise, and the change in capital and demand flows as a result of the new US presidency’s economic and political settings.
The consolidation in agriculture land ownership will continue with either bolt on acquisitions or portfolio role up purchases targeted by HNWI and institutional buyers. As a result, the average capital values on each deal will rise.
The launch of the Australian farmland index on 11 November 2016 in Brisbane will offer corporate agriculture and fund managers the opportunity to transparently measure farmland performance quarterly. This in turn will help North American and European fund managers invest more decisively into Australia.
Northern beef market is considered the hottest in both volume and price in 2016, as evidenced by a number of transactions exceeding $100 million each. Margins on beef cattle per head have increased significantly, which should encourage further investment in the sector. Also we are seeing more capital investment from existing large family operators.
In 2017 we see the cotton sector being the most active sector of the market since 2012, with a number of existing operators bolting on neighbours and new portfolios. Also North American investors will take the favourable currency and commodity environment as an opportunity to make their first entry.
In terms of the grain sector, even though the cereal grain prices are globally depressed, the pulse crops and in particular chickpeas will provide a huge earnings profile, driven by subcontinent demand pull through.
Horticulture sector will be driven by permeant tree crops like macadamias and almonds where we have seen record pricing occur, so a lot of interest will continue in this sector next year. The super foods like blueberry and raspberry subsector and other high value controlled environment crops are seeing significant long term supply agreements with existing supermarkets, and new entrants are driving this.
Sale and lease back transactions across all of the above sectors are gaining significant momentum as in-bound investors and high net investors seek to have no operational risk yet maintain a land heavy exposure to agriculture. The lease deals completed in 2016 are transacting at yield band from 5.5 per cent to 7.5 per cent as triple net lease structures.
Matthew Frazer-Ryan, National Director of Industrial
In the second half of 2016 we saw a significant increase in leasing transactions being concluded, compared to a very inactive first half. Over the past six months we tracked approximately 185,000sqm in transactions that have been agreed on for facilities greater than 10,000sqm. This activity has predominantly been driven by warehousing and logistics occupiers. We did expect to see more retail industrial land sales but this market has remained subdued due to restricted lending terms and uncertain economic conditions within Queensland. Many owner occupiers have been reserving capital within their business until the state economic conditions stabilise.
2017 will be a significant year for the occupier market. We are already working with over 275,000sqm in requirements across both tenant and owner occupier mandates. Demand is coming from groups looking to upgrade their facilities from B and C Grade assets into more modern premises with more efficient space solutions, as well as those whose lease expiries are approaching their 10 year anniversary. Prime grade investments are scarce and will be highly contested, so the investment opportunities lie within B and C grade where refurbishments and reconfigurations can add value in core locations.
The hotspots in Brisbane will continue to be industrial precincts within 15km radius of the CBD, with good arterial road connections and access to deep employment pools. Another interesting trend that will be prevalent throughout 2017 is an emergence of transition zone sites where users are finding a zoning uplift above an industrial use. A recent example of this is Harvey Norman’s purchase of Asahi bottling facility for bulk retail use in the MacGregor precinct south of Brisbane.
GOLD COAST MARKET commentary
Darrell Irwin, Director in Charge, Gold Coast
Income producing assets were the flavour of the year in 2016, with the strength of the market underpinned by commercial, industrial and retail investment transactions. We have also witnessed strong demand in the residential land subdivision, house and land, and townhouse market. Bank lending restrictions have dampened activity in large apartment project developments except for the Commonwealth Games Village and Wanda Jewel projects.
The Gold Coast economy is going from strength to strength on the back of tourism, construction and significant infrastructure spending. Chinese tourism has increased 30 per cent on last year. Several Gold Coast hotels have traded this year and the frenzy of activity in the industrial market was spurred on by warehousing solution and service industries expanding due to the booming tourism and construction sectors.
In 2017, we expect strong activity across the industrial and house and land markets to continue. Residential land development will continue to be influenced by the employment growth, tourism and infrastructure spending. Onshore buyers will drive investor demand, whilst offshore buyers are likely to choose the higher density residential offerings that are near central amenity, transport and the beach.
From a residential perspective, Coomera is one of the hotspots to watch due to the commencement of the Coomera Town Centre and several residential developments that are underway. Industrial offerings within the central Gold Coast region will continue to be highly sought after due to the limited supply.