As a more affordable cost of living lures people and businesses away from Sydney and Melbourne, the resulting demand for A-Grade offices could prevail over Australia’s tight lending market to deliver new stock within two years.
In the 12 months to the end of March, Queensland overtook Victoria as the most popular destination for people moving from other states, with gains of 24,000 compared to 15,100 in Victoria.
The majority of people who moved to Queensland were from New South Wales, and they landed in the Gold Coast, as well as the state’s other smaller metropolitan areas.
A Deloitte report refers to interstate migrants “fleeing the mind-blowing cost of housing in Sydney”.
This shift of people along with projections of further population growth in the Gold Coast is translating to business confidence.
Currently, “solid tenant activity for quality office stock” is characterising the demand for modern, well located office accommodation, says Lisa Murdoch, Valuations and Advisory, Investment Property at JLL.
Positive signs ahead
Major building refurbishments are prompting tenants to upgrade, she says, adding that affordability has also been a key driver.
A-grade gross face rents in the Gold Coast city centre average A$456 per-square-metre compared to A$1,259 per-square-metre in Sydney and A$586 in Melbourne.
However, when considered against land values, commercial development is not yet a viable option for investors.
“Currently, rental growth hasn’t been high enough to go down the commercial route,” Murdoch says.
“The land is worth more as residential at the moment with most precincts allow either type of development”.
“Office developers will need about $500 per-square-metre net to make a development stack up”, says Murdoch
A market shift
The Gold Coast is, however, “at the cusp of seeing new development”.
Vacancy for A-Grade offices is down to 12 percent and falling, which is the lowest it has been over a sustained period since the global financial crisis.
“With no new stock due to come online in the short term, the city will work through its vacancy, demand will keep bubbling away, and rental growth will accelerate. At this point, possibly over the next two years, I’d anticipate major investors starting to position themselves to transact” says Murdoch.
Institutions will follow
In today’s constrained debt market, institutional investors are more likely to look at the lower-risk suburban Brisbane commercial market, says Murdoch.
Investment yields are on average 7.5 percent in the Gold Coast, compared to 4.8 percent in Brisbane for A-Grade offices.
Until institutions begin to make a major play in the Gold Coast, it will remain the domain of property syndicates, which, unlike individual developers and private investors, have better access to finance through the corralling of cashed-up smaller investors.
One syndicate is GDI Property Group, the owner of 50 Cavill Avenue, the Gold Coast’s largest A-Grade building.
Following a A$10 million refurbishment, the landlord recently secured Ernst Body Corporate Management, which took 674 square metres of space in the building on a seven-year lease at A$450 per square metre.
The new tenant joins other occupiers including, Channel 9, Mantra, CBRE, Maven Dental Group, Regus and Auto Guru, and takes the building to 97 per cent occupancy.
GDI is now seeking a buyer for the building, which has a price tag of A$105 million – double its purchase price.
The eventual buyer will be among an “astute few who can see a new investment wave coming”, Murdoch says.