The recession over, Canberra’s commercial property market is reshaping.
The outward sign is that three big buildings have changed hands in the past couple of months, but there are some more subtle currents ebbing and flowing that could result in some changes to the functioning of Civic.
But the prospect for new building remains bleak, partly because of government policy.
Canberra if often touted as recession-proof, or at least carrying greater immunity to recessions than other capitals, but that is not entirely true.
During the recession the Canberra statistics for vacancy rate, yield, rent growth and written back value remained better than elsewhere in Australia, and is still better. However, because market sentiment was against property investment there was very little buying in Canberra during the recession, particularly by the big institutions. Those that did own buildings in Canberra sat pat taking higher returns than on buildings in other cities.
As Australia comes out of recession and investment sentiment changes there is now more money around for commercial property. Further, the boost in superannuation funds as the super levy money builds up has added to the money available.
You might think that investors would prefer to buy buildings in other capitals where returns are likely to grow more quickly as the business and property-sentiment picks up. That, however, is not the case. Rather the large funds and insurance companies with funds and sentiment bringing them back into the market are saying: “”The recession has taught us that the public-sector buffer in Canberra makes its dip during recession less pronounced and its peak is also less pronounced. So now we have got the chance we should pick up a quality building in Canberra to even out our portfolio when the next recession hits.”
And thus in May, the Westpac Property Trust bought the Austrade building at 73 Northbourne Avenue and in June it bought 64 Northbourne Avenue for $20.12 and this month the MLC Tower was bought by Barclays de Zoete Wedd for $47.5 million.
But there may not be much more around to buy, according to Jones Lang Wooton’s Nick George and Greg Lyons. Lyons is also chair of the market report committee of the Building Owners and Managers Association.
They say that a couple more buildings might be coming up for sale, but after that there will not be many more.
One of the reasons is that there are series of buildings in Civic with leases running out in 1996 and 1997. It is likely that the owners will keep the buildings until they have renegotiated the leases, which they will be able to do fairly easily because the tenants have nowhere else to go.
The post-recession changes in Canberra are likely to be:
1. A series of major refurbishments by government and continued conglomeration of departments in one location.
2. The creation of a larger second-level market below the prime market, mainly in Civic.
3. No early major government office development at Gungahlin in the same way as Belconnen, Woden and Tuggeranong.
4. No major new buildings without pre-determined tenants and continued loss of new private-sector building activity without changes to government policy.
5. Some testing of the inner-city quality residential market.
About 70 percent of Canberra’s office space is government. Government influence is therefore quite profound. Departments are have a greater say in their accommodation. There has been a trend for departments to try to get accommodation in one place. That either means a single purpose-built building or moving into buildings close to each other. Government has also changed from building to a cost per metre to building to high specifications, largely driven by occupational-health-and-safety concerns and also because in the long term a better building costs less. Government is going for prime office space. As a result the vacancy rate for prime office space is minimal in Canberra. Overall it is about 5 per cent. In Sydney and Melbourne it is as high as 20 per cent.
As public servants move out of older buildings, such as those around University Avenue, they often cannot be relet to government tenants. The floor-to-ceiling space is too small, fire requirements and airconditioning cannot be brought up to standard at a reasonable cost and floor areas are too small.
As they are refurbished, these buildings will becoming the backbone of a greater secondary office market in Civic.
Until quite recently the rent differential between the primary and secondary market has not been very great. In the late 1980s when Civic exploded with new buildings and high rents a lot of medium professional firms left for the suburbs and other town centres. These firms will now find it more attractive to come back to Civic.
“”The Canberra commercial property market is maturing,” Nick George said. “”With the prime and the secondary market more differentiated, Canberra is becoming more like other older cities.”
For a long time in Canberra much had been new, prime and purpose-occupied.
The Federal Government is facing some major refurbishment work as the Department of Foreign Affairs and Trade moves in to York Park.
Treasury, Russell, Benjamin and Cameron Offices all need refurbishing now or quite soon. It is possible there will be a round-robin of departmental moves to enable sequential refurbishment.
It is unlikely that Gungahlin will be the beneficiary of a shiny new government office block in the way Tuggeranong and before it Belconnen and Woden were developed. Public-sector growth and departmental moves into Canberra are not like in the 1970s, and Gungahlin has not yet got a Ros Kelly to promote the cause.
The new building scene is fairly grim.
The president of the Building Owners and Managers Association, Tony Hedley, says that since the ACT Government increased betterment from 50 per cent to 100 per cent a year ago, there has been no commercial redevelopment projects under the new rules in Canberra.
“”The Government has taxed so high that it has driven the thing it is taxing out of existence,” he said. “”Fifty per cent of something is something; 100 per cent of nothing is nothing.”
The leasehold system “”is a further chip in the facade of investor confidence”.
From 1977 to 1992 people could get their commercial leases renewed for 99 years on payment of 10 per cent of unimproved value. That policy had been stopped and replaced with nothing. Some leases with, say, only 20 years to run were facing financing difficulties.
Height limits (no building over 617 metres above sea level) and other strict planning requirements were also an impediment to development.
“”Capital is mobile,” he said. “”Investors will go elsewhere where planning rules are less onerous.”
With betterment at 100 per cent, rents would have to go up $150 a square metre to make redevelopment economic, he said.
It is now about $400 for prime space.
Lyons and George say that several vacant (carpark) sites in Civic would eventually get built on: Section 52 opposite the Boulevard; Section 61 on the west side of London Circuit; and Section 56 the large carpark on Bunda Street.
The testing of the inner-city residential market will come with the next large quality residential block. The ACT Government through its policy of 50-50 greenfields to in-fill hopes to use infrastructure better and build a livelier city centre. The theory is that with residents in the centre, Civic will not just be a young people’s nightclub beat after hours.
Four major high-end residential blocks have been constructed or are under construction: Capital Tower near the Lakeside, James Court on the Travelodge site, the ANZ site near the merry-go-round and the site opposite Glebe Park.
Nick George says that a very large proportion of residences sold will be used as managed apartments, not as owner-occupied residents. As managed apartments, they will be occupied by short-term residents _ people who come on a posting for a couple of weeks to up to a year. These postings are too long for a hotel and too short to buy.
It means many will be empty part of the time.
Kingston has suffered from this sort of occupancy. People imagined that Kingston shops would become livelier and more profitable with the redevelopment. It has not happened to the extent imagined.