Will the return return?
Written on the 30 November -1 by Napier & Blakeley director ALASTAIR WALKER
Property investment can be a perplexing business - particularly on the Gold Coast
EVEN when all the fundamentals seem to be right - relatively low interest rates, plenty of available cash and significant availability of finance - investors still may not be interested in what the city has to offer ... predominantly residential real estate.
Prevailing market opinions point to a substantial slowing of sales of residential property as an investment and in the suburbs. Is it too expensive? Is there too much of it? Probably neither, but perception can create a powerful negative vibe in the marketplace.
Even for those planning to build, pricing has certainly stabilised, some construction trades may even come down in price and the availability of trades people is probably as good as it has been for some time - but still the equation seems too hard.
Land, where it's available, is not nearly as hot as it was two years ago, although availability of good strategic land at a reasonable price remains scarce.
The process of council approval is still a major investment hurdle with the time taken to obtain development and building approval still making it a substantially longer process than five years ago. And as they say, time is money. The council is, however, justifiably concerned over the future of the Coast, its future infrastructure requirements and its ability to handle rapid growth. If current population growth rates are maintained in the next five years, potentially another 100,000 people will call the Gold Coast home. This equates to 20 per cent more water required and 20 per cent more traffic to contend with.
But does this future growth produce an opportunity? It probably does, within certain sectors of the property market. Clearly, there will be a substantial requirement for new housing and retail outlets to supply a burgeoning population - and significantly, a huge opportunity for the commercial office sector.
If five per cent of these 100,000 people are white-collar workers, the commercial office space required to accommodate them at 15sqm each would equate to a further 75,000sqm of net lettable area (NLA). Is five per cent conservative? Maybe, maybe not. In addition to this space requirement, there will be the organic growth requirements of local business and relocation requirements from intra and interstate companies looking to establish themselves in this fast-growing region.
To put this in perspective, 75,000sqm of NLA equates to slightly less than currently exists in Bundall and slightly more than exists in either Robina or Surfers Paradise. It's a considerable chunk of space. Brisbane currently has record low vacancy, at less than three per cent, and the Gold Coast will certainly form part of a space solution for some Brisbane-based businesses that have leases expiring in the next few years- if there is good space to move into.
At the moment, the Coast's commercial office vacancy rate is around 7.5 per cent, which means about 25,000sqm of available space. But most of that space only provides small areas throughout the various office precincts of Southport, Bundall, Surfers Paradise, Robina and Broadbeach.
Vacancy rates should therefore stay low into the future, underpinned by the existing positive net-absorption rate of take up of available space, meaning that more space is in demand than is available, being made available or being developed. We will certainly never get back to the super high vacancy rates of 30 per cent plus of the early 1990s, when you could secure as much space as you wanted for a song. In the short term at least, we may conceivably get back to the record lows in the five to six per cent range achieved 18 months ago.
There are pockets of commercial space planned in the next few years which, if developed, could add anywhere from 30,000 to 60,000sqm - however, most of this space will only provide small total areas.
The new Corporate Centre Two at Bundall, launched last week, which will initially provide around 8000sqm of NLA, will come on stream in mid-2008. Given the information above, one would imagine, that a substantial amount of that space will be spoken for pre-completion.
At the moment, this development would be the largest single space planned, but it only represents potentially 10 per cent of the space requirement in the next five years. From a development point of view, low vacancy rates and solid demand mean higher rent and little in the way of incentive - so it's a developer's dream market. As we detailed in a previous article, property investors are screaming out for good developments and built assets to buy and the larger ones are still having to extend further into offshore markets because of the lack of good local stock.
Investment in foreign property by Australian-based companies has increased four-fold in a year, with more than $5 billion heading overseas in the first six months of this year. The commercial office market will create substantial opportunity for developers, builders and associated service providers in the next few years.
With acquisition yields dipping under six months in some recent commercial office deals, this opportunity will bring with it the return of significant returns. Smart development should recognise that in our changing society - with a greater emphasis on work/life balance - the Gold Coast is the perfect place to create fantastic working environments that will attract and retain good people, stimulate business growth and reward good investment strategies.
Author: Napier & Blakeley director ALASTAIR WALKER