How will the upcoming election impact the Canberra office market? Steven Flannery

Employment has become a key issue for the ACT office market, with continued public service staff cuts and efficiency pressures resulting in a stagnated leasing market.

Estimates are that 10,000 – 14,000 public service jobs may be cut over the coming years, regardless of which political party comes to power following the September 2013 federal election. Given the concentration of public servants in Canberra, this is likely to have a significant ongoing impact on the local office market.

There is likely to be a short-term, six to 18 months, decline in confidence should the Liberals get elected. However, nationally the property mood will improve given some certainty.

For the vast bulk of public servants nothing will change however, confidence will be eroded until the look and feel of the new Government is established and there is likely to be some churn in our office market next calendar year as departments are re shaped/ badged.

If history is anything to go by, many jobs that are spilled will be replaced with consultant positions that will be handed back to the government. This may take six to 12 months.

Over the past three years the Canberra office market has seen the emergence of a two tier market, with an increasing price gap between A-grade and secondary stock. This is expected to continue as building owners struggle to secure long term tenancies in light of the Commonwealth’s desire to cut spending. This will place downward pressure on WALE’s and impact investor confidence.

The Canberra office market will remain soft. However, some of the new, never occupied office space that was built on-spec at the end of the last supply cycle, in 2010, may be taken up as it complies with the government’s sustainability needs and is ready to occupy.

Demand for new A-grade stock which meets key sustainability indicator targets, such as NABERS ratings, is likely to remain more stable, with rental levels for these properties expected to maintain their current levels.

Incentives will remain a large part of the rental landscape while total vacancies trend above 10%.

We expect that A-grade incentives will remain relatively steady over the next year. However, some further tightening is possible if A-grade vacancy levels fall further. This will have an improved effect on A-grade gross effective rents thereafter. Face rents however, are unlikely to have large upward growth over the next three years.

With the growing importance of NABERS ratings, owners of secondary stock will be faced with a decision of whether to upgrade or try and lease an asset in an environment of high secondary vacancy.

A further setback for these owners is the government’s announcement not to honour the $1 billion tax break for green initiatives (retro fit and refurbish) which was due to commence on the 1st of July 2012. The improvement in the secondary market will strongly lag the A-grade market, and as such incentives will maintain their current high for the medium term. Hence the defined division of this two tier market.

Efficiency savings have become an increasing issue for property owners and developers as Government has increased the efficiency dividends to 1.5% in late 2011 to aid in reducing costs to meet surplus. Further cuts are likely in the lead up the federal election in September 2013 and particularly afterwards, regardless of which party takes office.

These factors have led to a lack of demand for new space by the public sector and an increased appetite for fitted out premises and cheaper accommodation alternatives.

A lack of supply over the next 12 to 24 months, combined with an environment which is unlikely to facilitate any speculated stock in the near future, are considered to see the vacancy rate trend above 10% for the short term, before contracting slightly.

The airport is an anomaly in the Canberra market as a significant amount of space has been built over recent years and has not yet been occupied.

In regards to A-grade and B+ stock, rents are expected to remain stable however secondary space will continue to be challenging.

The local government needs to reset policy settings to provide a better framework for the refurbishment of conversion of older stock address this issue.

Investment activity in the Canberra Office market is likely to be limited for better quality assets as Insto and REIT’s look elsewhere for the short to medium term however the recent sale $151.7 m which should put some confidence back into Canberra’s A-grade asset market.


Steven Flannery is valuations director for Knight Frank, Canberra

 

 


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