Business services continue to outperform, despite soft economy

Business services continue to outperform, despite soft economy

13 December 2019

According to the latest Investa Inside Office Market Outlook November 2019, the business services economy has continued to outperform, despite the softness in Australian macroeconomic conditions.

Benefitting from a combination of weak wages growth, lower interest rates, a low Australian dollar and solid growth in government spending, positive operating conditions have driven continued white collar employment growth and outperformance in business services economic activity.

The underlying demand for office space across Australia’s major capital cities remains positive despite softer net absorption. In addition, lower interest rates present further upside to the outlook for office-based businesses.

David Cannington, Head of Research and Strategy, Investa said: “Indicators of office-based business activity continue to support a view that office leasing market demand is holding up relatively well in the face of broader economic softness. Lower major office market net absorption levels have coincided with a severe shortage of available space in Sydney and Melbourne, which has acted as a handbrake on absorption levels.”

Positive underlying drivers of demand for capital city office space position both Sydney and Melbourne’s office markets favourably in the face of a solid approaching new office supply cycle.

Sydney leasing market conditions will remain tight in 2020 while conditions in Melbourne will ease from the prevailing low-term vacancy lows.

“Following a two-year lull, the tide of new office supply is turning. Melbourne’s office leasing market will unwind in 2020 from the strong conditions of the past year. In comparison, Sydney will remain supply constrained for at least another year,” said Mr Cannington.

A positive outlook for Australia’s major office leasing markets, combined with increased financial volatility and political uncertainty in foreign developed economies have amplified investor demand for Australia’s major office market capital transactions.

In the 12 months to September 2019, transacted capital was 3.35% higher on the previous year, to break a new all-time high of $16.0 billion. In comparison, the remainder of the Australian economy increased by a more modest 1.45%, according to the ABS.

The major source of capital driving this all-time high, has come from institutional investors with unlisted wholesale funds, contributing almost 50% of total Australian CBD office capital purchases in the year. In particular, CBD office asset sales to Australian wholesale funds contributed $5.4 billion (~34%) to the total capital transacted in the year.

“Investors from both offshore and domestic sources are increasingly attracted to the high and comparatively stable total return offered by office markets in Australia’s major capital cities. Global political issues and increased volatility in foreign markets is only strengthening capital flow to Australia’s major office markets.

“Consequently, Australian office cap rates will remain under downward pressure. We expect prime office market cap rates will compress further over the next 12-18 months and looking further ahead, will remain lower for even longer,” said Mr Cannington.