Perth set to outperform Sydney; CBRE predicts

A CBRE report published last week entitled ‘Counter-cyclical Perth: Is now the time to buy?’ has shone a light on Australia’s western capital, demonstrating the city’s shift in the commercial investment market and critical timing amid increased attention.

Perth’s commercial property market has re-surfaced on investors’ radars, with increased investment activity throughout 2018 driving office transactions to reach $1 billion by the end of the year.

A resurgence in the resources sector has underpinned the increase in investment activity, giving rise to business and consumer sentiment and ultimately re-invigorating a favourable environment for counter-cyclical investments.

CBRE Research Manager Gemma Alexander said the time is now for counter-cyclical investment in Perth’s commercial office market.

“When it comes to counter-cyclical investment, timing is critical, but so too is factoring in the expected hold period after executing a transaction. Based on stabilising conditions, forecasts show an investor entering the Perth prime CBD office market at the beginning of 2019 and holding for three years would receive a total return similar to what we forecast for the Sydney prime CBD office market.

“But as an investor increases the hold period, Perth begins to outperform Sydney. The gradual return to long-term pricing relativities will deliver Perth superior capital growth and total returns.”

Sought-after localities have seen rents remain stagnant over the past 18-months, with secondary rents recently bottoming out. Total CBD vacancy peaked in January 2017 at 22.5% and have since been in decline – sitting at 19.4% in July 2018.

The CBRE report reveals that after more than four years of significant decline, the Perth office market has moved begun its u-shaped revival.

“We expect rental growth will accelerate from 2019, and as a result, the current yield spread over Sydney, which is at an almost record high, will gradually narrow to a level more consistent with the long-term average of 125bps,” Ms Alexander said.

“As this narrowing of the yield spread occurs, Perth will outperform Sydney in terms of capital growth and total return.”

Offshore capital has also been bolstering investment activity amid an increased demand for Perth office space.

“This year has seen a significant spike in interest for Perth assets from both domestic and offshore investors, with the total transaction volume expected to reach as high as $1 billion by the end of 2018,” CBRE’s Head of Capital Markets, WA, Aaron Desange, said.

“Investors with portfolios heavily weighted to Sydney or Melbourne are increasingly seeking to acquire assets in WA to reduce portfolio risk by providing a hedging impact. And with significant yield premiums on offer compared to east coast and Asian markets – averaging 220bps in the case of Sydney – greater transaction activity in Perth is only hindered by a lack of investment-grade assets being offered for sale.”

Mr Desange said the upturn in transaction activity highlighted growing awareness among investors that Perth’s market was positively positioned.

“Despite ongoing yield compression in the market since 2013, at just under 7%, Perth’s prime CBD office assets are still trading at a premium when compared to Sydney. As the office market environment continues to improve, amid a resurgence of resource activity and strengthening economic conditions, sentiment surrounding Perth investment will continue to improve,” Mr Desange said.

“This is particularly evident among South East Asia investors who are coming to Perth seeking ‘opportunistic’ buys at the bottom of the market cycle. There is a growing awareness that Perth is now the right time to buy, which we expect will provide a springboard for greater transaction activity moving forward.”

Read the full report here