QLD property market and predictions for 2020

CAPITAL MARKETS

Anthony Ott, Managing Director of Queensland at Savills Australia, said that there has been a consistent investment appetite throughout 2019 which has been evident through strong transaction volumes, particularly across the CBD. 

“Further reduction in interest rates, a lowering in office vacancy and positive outlook in terms of tenant demand, together with a scarcity of available assets in other Australian markets, has all contributed to investors’ positive disposition to the Brisbane market,” Mr Ott said.

Savills identified investment into Brisbane office markets increased in 2019, with $3.6 billion invested across 39 transactions (≥$10m). CBD transactions underpinned investment volumes (75%), highlighted by 18 assets changing hands for a total of $2.7 billion, up 13% on 2018. 

Notably, there were a number of larger transactions which boosted overall volumes including Cromwell’s acquisition of 400 George Street for $525 million, Ashe Morgan’s purchase of The Complex for circa $425 million, and Shayher Group buying QIC’s Queen and Albert for $395 million.

While foreign investors continued to be active in the market, deploying $1.4 billion over ten deals, there was a reduction in capital inflow from offshore investors of approximately $700 million in the CBD market and approximately $1.8 billion of capital outflows from foreign owners.

“Despite ongoing activity from offshore buyers into the Brisbane market, the State Governments decision to impose increased land tax charges on foreign investors has certainly been a factor in slowing the quantum of investment from offshore entities.”  

Foreign buyers continue to build their presence in near-city markets, with Credit Suisse acquiring Jubilee Place on a fund-through basis and AM Alpha acquiring the T C Beirne building in Fortitude Valley during the year.

According to Mr Ott, offshore capital remains attracted to the yield spread Australian commercial real estate markets offer relative to their country of origin. 

“The yield differential Brisbane offers relative to the tightly held Sydney and Melbourne office markets leaves Brisbane well-placed for sustained investment focus.”

“The movement of global capital has also shifted with a slowdown in investment activity from Asian capital, but we are seeing more capital emanating from Europe, particularly Germany,” he said. 

2019 saw a rise in activity from private investors with an increase of approximately $300 million worth of investment by private entities. 

“The search for yield and the competition for assets resulted in an increase in sales activity within the suburban markets, particularly in business park environments such as Cannon Hill and Eight Mile Plains,” Mr Ott said.

Savills expects to see investment demand remaining strong in 2020, however, asset availability is likely to be more constrained.

“Many of the domestic funds are well capitalised following successful capital raisings through 2019. We expect office and industrial markets to be the primary focus for investment from these groups through 2020. Lower debt costs, reduced hedging costs, and the search for yield will see ongoing demand from offshore capital. 

“The big question is how much of this capital demand will be satisfied in Brisbane given the quantum of assets that have traded over recent years and the reluctance of many vendors to sell without having sale proceeds allocated to other investment,” Mr Ott said.

METROPOLITAN & REGIONAL SALES

Queensland’s metropolitan and regional markets have been led by acquisitive foreign investors, syndicates, and private investors chasing yield.

Gregory Woods, Director of Metropolitan and Regional Markets at Savills Australia, declared 2019 ‘a year of sustained investment appetite’.

“This, along with improved leasing fundamentals and ongoing development activity in established and gentrifying commercial locations, is positioning Brisbane’s metropolitan and regional investment markets well, moving into 2020,” Mr Woods said.

Throughout 2019 YTD, Queensland’s metropolitan and regional office markets witnessed 35 assets (≥$5m) change hands, totaling $1 billion. Although, taking into account a year-on-year decline of 21% in total investment volumes, transactions were more numerous in number, up from 31 recorded from the previous year.

The Urban Renewal market remains the investment destination of choice outside of the Brisbane CBD, with $470 million (47%) invested across eight deals, led by foreign acquisitions of Jubilee Place and TCB on Brunswick. 

Outside of key fringe markets, Toowong garnered improved interest throughout the year, recording three transactions totalling $82 million, though standout suburban office transactions included Charter Hall REIT’s purchase of the ATO building in Upper Mount Gravatt from LaSalle for $63.6 million and Hume Properties divesting 2 Burke Street, Woolloongabba for circa $47 million. 

At the regional end of the ledger, investment volumes and deal count were also down year-on-year, though assets continued to trade, supported by attractive yields on offer. 

In terms of location, much of the regional investment focus in 2018 was in Townsville, with 2019 characterised by deals in Toowoomba and Cairns. The purchase of the Ergon Building on Bunda Street in Cairns was most notable, purchased by Collective Capital Investments for a reported $14.7 million. 

“Regional assets continue to play a role in Queensland’s office investment landscape and appetite remains unabated for investments located outside the Queensland capital of Brisbane.”

“These assets typically offer more attractive rental returns than lower yielding CBD assets and often with similar WALE profiles,” Mr Woods said.

The Savills Metropolitan and Regional Markets team, led by Gregory Woods has already earmarked various assets that are ‘on the blocks’ and will be offered to the market in Q1-2020 in this particular sector of the market. 

INDUSTRIAL

According to Savills Australia, major project and infrastructure completions in Queensland have helped stimulate economic progression, industrial investment demand, and leasing take up.

Callum Stenson, State Director of Industrial & Logistics at Savills Australia, noted that a positive spill-over effect into Brisbane’s industrial markets was imminent.

“Investors are searching the market for quality investments and after a strong flurry at the start of the year, which saw some major transactions in Brisbane, the paucity of stock has stifled these major transactions,” Mr Stenson said.

Savills has recorded three major industrial sales transacting at over $100 million in 2019 across the Brisbane market: 111-137 Magnesium Drive at Crestmead for $182.50 million, 99 Sandstone Place, Parkinson for $134.2 million and 81 Schneider Road in Eagle Farm at $102.5 million. 

“However, there currently remains a lack of quality industrial investment offerings in the $10 million plus range being brought to the market,” Mr Stenson said.

The leasing market remains strong, with high levels of leasing activity being experienced across all sizes. This has dropped the Brisbane vacancy rate to 4.05%, the lowest vacancy over the past 5 years.

Queensland’s online retail demand will continue to drive requirements across the market, where ecommerce logistics, distribution and warehousing has shown a growth of 5.2% annually, which was the highest of any state nationally. 

Savills Research forecast this growth to generate an additional 350,000sq m of industrial space every year. 

Mr Stenson said that tenants are still seeking the flight to quality option as well as consolidation which are fueling demand for new construction, which in turn should lead to rental growth.

“This can be seen in the pre-lease market, particularly in the South along the Logan Motorway corridor where Huhtamaki, Phoenix, CEVA and DHL have taken up 60,000sq m over the last 12 months,” he said.

Trends are suggesting that developers plan to capitalise on strong tenant demand by constructing speculative build to market warehousing solutions. 

A recent example of this has been Dexus’ approval to build a 50,000sq m warehouse on Freeman Road at Richlands. A successful example of such confidence is in Willawong, where Stockland has fully leased their speculative 18,456sq m building in under four months. 

Industrial land in the immediate Brisbane precinct has seen almost complete exhaustion of industrial land supply over the last 12 months. 

“Larger lots have become extremely scarce as we have seen considerable take up to service some of the recent ‘supersize’ requirements coming to market,” Mr Stenson said. 

Investors have now moved to Brisbane’s outskirts, as seen with Mapletree, who have purchased 36ha of industrial land in Crestmead for a reported $95 million.

“Based on the current land take-up rate, we expect the demand for industrial land will overtake supply by 2035,” Mr Stenson said.

OFFICE LEASING

The Brisbane CBD office leasing market is continuing to strengthen with positive net absorption anticipated to continue during 2020. 

Quality of product and amenity continues to attract tenants of all sizes with much of the demand heightened by withdrawal of the Brisbane Transit Centre along with others over the past 12 months.

According to John McDonald, State Director of Office Leasing at Savills Australia, 2019 has demonstrated another active year for the commercial office leasing sector with vacancy tightening from 13% to 11.9% in the six months from January to July 2019.

“The last twelve months has seen an improvement in sentiment across the Brisbane office markets, which has been fueled largely by co-working expansion, State and Federal Government requirements and the rebounding resources and infrastructure sector,” Mr McDonald said.

New developments currently underway such as 80 Ann Street and the soon to be completed 300 George Street will further strengthen the immediate precinct, also offering rejuvenated amenity to neighbouring businesses.

“The market has responded exceptionally well to this additional space coming online,” he said.

Rental growth continues to be evident across markets with A-Grade gross rents experiencing 4.4% growth in the past 12 months, and we see this continuing well into 2020.

Incentive levels remain stubbornly high, reaching 35%- 40% in both prime and secondary grade markets.

“We expect a slight upturn in the vacancy levels taking into account oncoming stock to the market in early 2020. Despite this, we forecast that continued demand will assist in stabilising these figures in Q3 and Q4,” Mr McDonald said. 

Rental growth is also foreseen, predominantly in well-positioned assets. However we expect to see incentives remain, hovering around the 35-40% mark over the next 12 months.

HOTELS 

A flurry of interstate buyer activity has rounded out a solid year for Queensland’s Regional Hotel market, with interstate conditions forecasted to position these assets favourably in 2020.

According to Leon Alaban, Director of Hotels at Savills Australia, South East Queensland’s hotel market has remained mostly tightly held throughout 2019, with strategic off-market opportunities transacting. 

“Pubs remain a solid and preferred investment type representing good cash flow and value in comparison to other investment types. 

“We expect to see investors turn their attention even more towards hotel assets as the trend becomes more prominent throughout 2020,” he said. 

Some notable South East Queensland transactions during the year included the Grandview Hotel in Cleveland, Normanby Hotel in Red Hill, Creek Tavern in Mountain Creek, the Coolangatta Sands Hotel, the Ivory Tavern at Tweed Heads, Samford Valley Hotel, and, scraping in under contract before the end of the calendar year, the Mon Komo Hotel in Redcliffe. 

While yields continue to stabilise, 2020 will encourage further tightening of commodities with coastal asset yields also expected to improve slightly. 

Larger buyer groups looking to expand their portfolios are expected to be more active in 2020, with Queensland assets positioned to be a more attractive option with higher yielding returns compared to those interstate. 

Such groups are expanding with the view of a private equity buyout or an initial public offering (IPO), with economic conditions expected to remain unchanged until at least the first half of next year.

SUNSHINE COAST

Savills Sunshine Coast have experienced a relatively strong 2019 across most sectors of the commercial property market with confidence demonstrated by a majority of developers and investors. 

Strong investor interest in the sub $2 million range has characterised the Sunshine Coast commercial sales market throughout 2019, according to Jason O’Meara and Scott Gardiner, Sunshine Coast Office Directors at Savills Australia. 

“Despite the appetite, we have seen less investment property come onto the market than in previous years, as owners are generally holding onto their assets as superior investment product is scarce,” Mr O’Meara said.

Due to this, we see yields still staying at low levels, maybe even compressing more for quality A Grade investment stock. 

A recent example of this was an industrial sale at Sunshine Coast Industrial Park located in Bells Creek that sold by Savills for a record of $13.1 million reflecting a 6.8% yield on a new 10 year lease. Additionally, located at Beerwah, Savills sold a medical centre for $3.6 million reflecting a yield of 7.5%.

“This demonstrates strong interest from buyers looking for quality investments, but across the board motivated sellers are thin on the ground,” Mr O’Meara said.

The industrial market has proven to be the most active sector in the Sunshine Coast marketplace with land sales remaining particularly strong, despite vacant land supply tightening. 

“After hitting the market 15 years ago, Central Park Coolum has completely sold out this year. We only have seven blocks remaining in Suncoast Business Park and some larger lots still available within Coolum Eco Park,” Mr Gardiner said.

We are seeing a continued momentum from the prior year in regards to sale and leasing activity for industrial warehouses which has been the driving force behind industrial land sales.

“This sales activity for industrial warehouses has been pushed along by owner occupiers off the back of attractive interest rates with repayments lower than rental,” Mr Gardiner said.

Both the retail and office markets have had a challenging year similar to the trends of 2017 & 2018 with available vacancy remaining high and take-up expected to soften further over the next 12 months. 

“We have seen only a handful of large office leases between 500 - 1,100sq m throughout 2019, as some southern state and outer Queensland regional businesses open on the Sunshine Coast in order to create better lifestyle options for staff,” Mr Gardiner said.

Notably, Savills transacted 580sq m to Huddle Insurance at The Edge in Kawana, who expanded out of Sydney. 

Confidence still remains upbeat across the region, fueled by low interest rates, employment growth, live-ability and major infrastructure projects nearing closer to completion. 

Projects such as the expansion of the Sunshine Coast Airport, SunCentral development– Maroochydore’s new CBD, the opening of the Sunshine Plaza expansion and Bruce Highway upgrades have all contributed to the continued confidence story in this region.

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