record supply additions on key facts the horizon...key facts the horizon over 148,000 sq m of stock...
TRANSCRIPT
RESEARCH
Key Facts
Over 148,000 sq m of stock is currently under construction, of
which 90% been pre-committed;
this is anticipated to keep vacancy tight.
Significant rental growth has been underpinned by limited stock,
increasing prime gross face rents
by 6.2% YoY.
Total transaction volumes in the 12 months to January 2019
totalled $495.5 million, driven by
institutional investment.
Senior Analyst
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Record supply additions on the horizon Parramatta’s office market is transforming
and the pipeline of commercial
developments is at the forefront of wider
urban development. Institutions are
investing heavily and not only has vacancy
tightened to a 29-year low, significant uplift
in values is being recorded.
The final two Parramatta Square Towers
(120,000 sq m), known as Stages 6 and 8,
are the latest projects to receive approval.
Construction could potentially begin this
year. A further 280,000 sq m of
developments projects are at various
stages of planning, indicative of the long-
term confidence in Parramatta’s office
market.
Over 148,000 sq m is under construction
across four developments, with all
expected to be complete by early 2021.
Stage 4 of Parramatta Square (65,000 sq
m) is 100% pre-committed to the NSW
Government and is due online in Q1-2020,
while Stage 3 (43,000 sq m), which is pre-
committed to NAB, is due late 2020. The
balance of current project works is due to
be completed in Q1-2021, including 2-6
Hassall Street (26,000 sq m) and 32
Smith Street (26,000 sq m). University of
NSW (UNSW) and Western Sydney
University (WSU) have secured the
majority of 2-6 Hassall Street and 32
Smith Street is 51% pre-leased by QBE.
New supply in 2018 stemmed from the
NSW Department of Education’s new
headquarters at 105 Phillip Street (25,000
sq m) and a full refurbishment at 426
Church Street (1,920 sq m).
FIGURE 1
Parramatta office Supply Per six month period (000’ sq m)
Source: Knight Frank Research/PCA
-20
-10
0
10
20
30
40
50
60
70
Jan-
09
Jan-
10
Jan-
11
Jan-
12
Jan-
13
Jan-
14
Jan-
15
Jan-
16
Jan-
17
Jan-
18
Jan-
19
Jan-
20
Jan-
21
Gross Additions Withdrawals Ne t Additions
2
Source: Knight Frank Research/PCA ^ Based on an assumed 5 year WALE
Source: Knight Frank Research
FIGURE 3
Average Gross Effective Rent Parramatta ($/sq m)
TABLE 1
Parramatta Office Market Indicators as at January 2019
Grade Total Stock
(sq m)
Vacancy
Rate (%)
Annual Net
Absorption (sq
m)
Annual Net
Additions
(sq m)
Average Gross
Face Rent ($/
sq m)
Average Net
Incentive (%)
Average Core
Market Yield (%)^
Outgoings
($/sq m)
Prime 324,617 0.8 22,331 25,000 668 18.0 5.25 - 6.25 118
Secondary 394,930 4.9 -8,717 -10,869 577 19.4 5.50 - 6.75 121
Total 719,547 3.0 13,614 14,131
Source: Knight Frank Research/PCA
FIGURE 2
Parramatta Vacancy Total vacancy by grade (%)
Source: Knight Frank Research/PCA
There remains strong tenant enquiry for
the Parramatta market with several large
requirements, including the NSW
Government (45,000 sq m), Westpac
(10,000 sq m), Samsung (13,000 sq m)
and Link Marketing (20,000 sq m). These
leasing mandates could potentially fill
backfill space options and provide pre-
commitments to projects earmarked for
development.
Vacancy hits 29-year low The overall vacancy rate as at January
2019 tightened to 3.0%, slightly down
from 3.2% six months prior. This is the
lowest rate since January 1990 and well
below the 10-year average of 7.1%.
Constrained new supply over the period
and positive absorption have contributed
to the historically low vacancy rate.
Split by grade, the prime market vacancy
rate remains one of the lowest in the
country measuring 0.8% as at January
2019. In the secondary market, vacancy
declined slightly from 5.0% to 4.9% over
the same period. This is anticipated to fall
further over the next six months.
While the positive outlook for office
demand is expected to continue, the
delivery of new supply over the two years
to 2021 may increase backfill availability
FIGURE 4
Net Absorption and Vacancy Per six month period (000’s, %)
0
2
4
6
8
10
12
14
16
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
PRIME SECONDARY
0
100
200
300
400
500
600
700
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
Jan-21
PRIME SECONDARY
Forecast
Moderate absorption levels
Historically, net absorption in Parramatta
has been driven by the supply cycle.
Given this dynamic, the lack of recent
supply additions has tempered absorption
levels, which totalled a modest 923 sq m
in the six months to January 2019.
While the pipeline of new supply reflects
large office demand requirements,
demand for smaller units is growing and
has been a key driver of take-up recently.
Examples include Dyson Appliances (897
sq m), Sirius Technology (138 sq m) and
Hays Recruitment, who leased 800 sq m
at 80 George Street.
Pre-commitments to bolster future absorption The current development pipeline is 90%
pre-committed and based on current
demand levels, this could be close to
100% before practical completion.
Demand for new office space is
anticipated to trigger a period of elevated
absorption levels during the next two
years. Underscored by new entrants,
including the NSW Government relocating
to Parramatta Square and QBE to 32
Smith Street, absorption levels are
projected to be over 100,000 sq m over
this period, well above the 10-year
average (5,000 sq m).
and put some pressure on the headline
vacancy rate at that time.
Rental growth continues The tightening vacancy rate in Parramatta,
in conjunction with limited incoming
speculative stock in the near term,
continues to buoy face rental growth in
both the prime and secondary markets.
In the 12 months to January 2019, gross
face rents reached $668/sq m, up 6.2%
YoY and well above the 10-year average of
4.3%. Prime incentives contracted by
40bps over the same period to average
18%, resulting in gross effective rental
growth of 6.5% YoY ($548/sq m).
In a sign of growing demand for the
Parramatta office market, secondary rental
growth has outpaced prime growth, rising
7.6% YoY to average $577/sq m on a gross
face basis (as at January 2019). Incentives
have declined to around 19%-20%, down
from 20%-21% a year ago, boosting gross
effective rental growth to 9.3% YoY. While
some tenants are seeking more affordable
options relative to the Sydney CBD market,
rental growth is also being shaped by an
increase in competition from new occupiers
due to recent infrastructure and building
improvements.
-3%
0%
3%
5%
8%
10%
13%
-10
0
10
20
30
40
50
60
70
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
Jan-21
Net Absorption Vacancy Rate
Forecast
3
RESEARCH PARRAMATTA OFFICE MARCH 2019
153 Macquarie St (Parramatta Square Stage 3)^ - 43,000m² [NAB]
Walker Corporation - H2 2020
Parramatta Sq. Stage 4^ - 65,000m² [NSW Government]
Walker Corporation - H2 2019
32 Smith St - 26,000m² - [QBE -51%]
GPT - H1 2021
2-6 Hassall Street - 27,000m² [UNSW & WSU]
Charter Hall -H1 2021
Parramatta Sq. Stage 6^ - 50,000m²+
Walker Corporation - 2021+
Parramatta Sq. Stage 8^ - 70,000m²+
Walker Corporation - 2021+
Greenway Plaza - 35,000m²
Coombes Drivas - 2022+
140 George Street - 45,000m²
Dexus -2021+
Westfield, 159 Church St - 112,000m²
Scentre Group - 2022+
1
2
3
4
5
6
7
8
9
4
Source: Knight Frank Research
BlackRock made their first foray into
Parramatta office market last year.
BlackRock acquired 91 Phillip Street
from Capital Property Funds for
$56.63 million on a core market yield
of 5.10%. It is understood that Capital
Property Funds received numerous
un-solicited approaches to acquire
the asset, possibly due to its future
redevelopment potential. 91 Phillip
Street was 100% leased at the time of
sale with a WALE of 2.7 years. More
recently, Brisbane City Council’s
future fund acquired 9 George Street
for $44.3 million on a passing yield of
5.67% and WALE of 3 years.
Yields tighten, but rate of compression now slowing The weight of capital over the last two
years has contributed to the recent
yield compression cycle. Although
investment volumes remain elevated,
the rate of compression has begun to
ease.
Relative to the same time last year,
average prime yields have
compressed 7 bps YoY to reach
5.74%, while average secondary
yields have compressed 12 bps to
6.05%.
Institutions continue to direct capital to Parramatta Investment volumes in the 12 months to
January 2019 reached $495.5 million
across eight transactions ($10m+).
While YoY investment volumes are
almost on par with 2017 ($497.6m), they
are well above the 10-year average, as
institutional investors continue to
increase their exposure to Parramatta’s
office market.
Despite the precinct’s attractive income
returns, as reflected in the positive
116bps yield spread above Sydney
CBD, its popularity as an investment
destination has been driven by strong
tenant demand for new development
options and long-term growth potential.
GPT’s acquisition of 60 Station Street
(Eclipse Tower) in August 2018 for
$277.6 million on a core market yield of
5.57% in August 2018 is the highest
value transaction on record for
Parramatta. In December 2018, GPT
announced plans to redirect the capital
from the $800 million sale of its 50%
stake in MLC Centre (Sydney CBD)
primarily into its development pipeline,
including the development at 32 Smith
Street.
Source: Knight Frank Research *passing yield #City of Brisbane Investment Corporation
TABLE 2
Recent Leasing Activity Parramatta
Address NLA
(m²)
Face
Rental
($/m²)
Term
yrs Lease Type Tenant
Lease
start
date
60 Station Street 2,644 590n 4 Renewal Landcom Sep-19
31-39 Macquarie
Street 3,012 450g 3 New Downer Group May-19
2-12 Macquarie
Street 932 520n 5+5 New Claim Central Mar-19
91 Phillip Street 346 475n 5+2 New Maurice Blackburn Jan-19
20 Smith Street 897 445n 2+3 Assignment Dyson Appliances Nov-18
Source: Knight Frank Research n refers net g refers gross
FIGURE 5
Average Core Market Yields Parramatta Yield (LHS) and Spread bps (RHS)
Despite this, yields are trading at their
lowest benchmark on record and more
than 200 bps below their 10-year
averages.
Over the last decade, the spread
between prime and secondary yields
has averaged around 106bps.
Secondary yields have compressed at a
slightly faster rate over the last three
years, indicative of the weight of capital
chasing assets with future
redevelopment potential and rental
reversion upside.
While the yield compression cycle may
be nearing its end, investors appear
increasingly focused on income growth
potential of their assets and portfolios.
Investment volumes have been
especially strong of late, reflecting both
a rise in demand and competitive yield
levels, relative to Sydney’s CBD office
market. Given the positive rental growth
outlook for Parramatta as urban renewal
continues and new stock is delivered,
there remains further potential for new
market entrants, both domestic and
offshore.
TABLE 3
Recent Sales Activity Parramatta ($10m+)
Address Price
($ mil)
Core Mkt
Yield (%) NLA (sq m)
$/sq m
NLA
WALE
(yrs) Vendor Purchaser
Sale
Date
9 George Street 44.3 5.67* 5,531 8,136 3.0 Hadley Green CBIC# Dec-18
33 Argyle Street 40.8 5.56 5,279 7,729 3.5 NSW Aboriginal Land
Council
TE2 Roxy Argyle Pty
Ltd Nov-18
91 Phillip Street 56.6 5.10 6,094 9,296 2.7 Capital Property Funds BlackRock Oct-18
60 Station Street 277.6 5.34 25,729 10,789 4.0 REST GPT Aug-18
0
20
40
60
80
100
120
140
160
5%
6%
7%
8%
9%
10%
11%
Jan
-09
Jan
-10
Jan
-11
Jan
-12
Jan
-13
Jan
-14
Jan
-15
Jan
-16
Jan
-17
Jan
-18
Jan
-19
Spread - Prime v Secondary (RHS) Prime Secondary
RESEARCH
Ben Burston
Partner, Head of Research and Consulting
+61 2 9036 6756
Katy Dean Associate Director
+61 2 9036 6612
Marco Mascitelli
Senior Analyst
+61 2 9036 6656
OFFICE LEASING
Aaron Weir
Partner, Head of Office Leasing, NSW
+61 2 9036 6890
David Howson
Partner, Head of Office Leasing, Australia
+61 2 9036 6697
[email protected] OFFICE LEASING—SYDNEY WEST
Giuseppe Ruberto
Partner, Head of Office Leasing, North
Sydney
+61 2 9028 1115
Tom Bartlett
Director—Office Leasing
+61 2 9761 1873
[email protected] CAPITAL MARKETS—SYDNEY METRO
Graeme Russell
Partner, Institutional Sales
+61 2 9036 6618
Tim Holtsbaum
Director, Institutional Sales
+61 2 9036 6615
Tyler Talbot
Partner, Institutional Sales
+61 2 9028 1148
[email protected] CAPITAL MARKETS—PARRAMATTA
Scott Timbrell
Partner, Head of Western Sydney
+61 2 9761 1823
Wally Scales
Director, Metropolitan Sales
+61 2 9761 1813
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