Perth and Brisbane CBD office markets surge in investment value as Sydney falls: Jones Lang LaSalle

The resource-dependent CBD office markets of Brisbane and Perth are becoming larger and more relevant investment destinations, with their cumulative value surging from 16% to nearly 26% of the national CBD office market in the past decade, according to research by Jones Lang LaSalle (JLL).

Both capital cities have benefited from demand for office space from companies tied to the mining boom, with JLL calculating that in value terms the two CBD markets have risen from $8.7 billion (16%) in 2001 to $29.3 billion in 2012.

At the same time the Sydney CBD market, which is more dependent on demand for office space from financial services, banking and professional services companies, represents less of the $114 billion national pie.

The market value of Sydney has increased from $27.8 billion in 2001 to $48.3 billion in the middle of 2012, but proportionally Sydney’s share of capital stock by value has declined from 51.2% in 2001 to 42.3% in mid-2012.

In keeping with this shift in investment value towards Brisbane and Perth, JLL believes investors should consider weighting their portfolios to reflect the national market.

John Talbot, managing director of investments and advisory at JLL, says investors have taken note of the increased scale and depth of the Brisbane and Perth markets and are looking to acquire product to help re-weight their portfolios.

The figures are included in a new JLL report authored by Talbot, which finds that nationally office markets have recorded strong capital value growth in the past decade following a steep drop following the early 1990s recession.

Jones Lang LaSalle says that between 1994 and 2011, the average growth in capital stock by value was 7.8% per annum and assesses the market value of the six CBD office markets (Sydney, Melbourne, Brisbane, Perth, Adelaide and Canberra) at $114.0 billion in mid-2012.

In 1994 the combined value of CBD office markets was $30.6 billion following a 53% fall in capital values between 1989 and 1993 due to the early 1990s recessions.

The report explores the issue of applying the value-weighted asset allocation strategy used in equity markets, where an investor would invest in a portfolio of stocks weighted by the overall market capitalisation, to a commercial property portfolio.

Under this asset allocation strategy, an investor changes his or her individual stock or sector allocations based on movements of individual stocks relative to the overall market capitalisation.

“This strategy is only one of a number of allocation strategies that can be adopted by a fund manager. However, we think there is a case for using a value-weighted asset allocation strategy for commercial property when you consider the performance of the market over time,” says Andrew Ballantyne, head of capital markets research at JLL.

JLL analysis shows that the share of capital stock by value across Australian CBD office markets has historically shown a close relationship, with each state’s share of economic output.

“Therefore, investors should consider their future weighting to the Perth and Brisbane office markets, as projections are that both state’s share of national output will increase by 2021.  WA is expected to account for 15.6% of Australia’s output in 2021 – 1 percentage point higher than in 2011. Meanwhile, Queensland’s share of national output will rise by 2.8 percentage points to 22% in 2021.

“The value-weighted asset allocation strategy can have some limitations in terms of diversification and while we don’t advocated this strategy being following slavishly, it does provide a useful reference point for investors benchmarking the performance of their portfolio against the market,” says  Ballantyne.

However the report does warn that there are limitations to this investment strategy when applied to commercial property investment.

“Commercial property is an illiquid asset class with high transaction costs.

“Furthermore, the lot size of individual assets ensures that the allocation of even very large portfolios can be significantly impacted by acquisitions or disposals.”

Talbot says investors will be reluctant to make changes to their asset allocations to reflect historical performance.

“Whilst pricing looks attractive across CBD office markets, an investor has to assess the underlying drivers of income in each individual asset and the potential for growth. At the same time, divergent economic growth rates across the states will create opportunities and risks investors as they seek their optimal portfolio weighting," says Talbot.

He concludes by saying that the value-weighted asset allocation strategy should not be followed “slavishly”, but provides a “useful reference point for investors benchmarking the performance of their portfolio against the market”.