Miners new frugality set small trend

The supply of new offices in the CBD and West Perth for the next two years will be dominated by smaller buildings that allow developers to manage a shift in the city's leasing environment as well as ongoing lending restrictions.

The smaller-building trend is in the context of figures from the Property Council of Australia that show a record 180,000sqm CBD office space was created - most of it in large office towers - last year.

In the leaner years ahead, 12,300sqm is expected to be added this year and 33,000sqm in the next.

About 64,000sqm of office space is in the pipeline for 2015.

"Overall the smaller buildings are a sign of a market that is taking fewer risks and looking for more certainty in terms of finance and leasing," Lino Iacomella, deputy executive director at the WA division of the Property Council of Australia, said.

Property Council of Australia figures released last week show the CBD is still digesting the large amount of space, for sub-lease, that was released to the market by engineering companies when their office requirements contracted after iron ore prices fell last year.

For the six months to January, the vacancy rate was 5.7 per cent in the CBD and 4.5 per cent in West Perth. The net absorption figure, the difference between office space leased and space vacated, was 102,870sqm for 2012 but in the second half, vacated space exceeded leased space by 18,332sqm.

A Property Council forum last week was told steep falls in iron ore prices, which have since rebounded 60 per cent from September, triggered a new cost structure for mining companies that has had a flow-on effect on office needs and staff numbers.

"Although the iron ore price is back at $US150 a tonne the cost structure has changed," Macquarie securities analyst Lee Bowers said. "Many miners have reassessed their costs.

"There's no question that in certain areas, essential personal and consultants will probably be cut back. That's something that will be addressed a little more actively and aggressively than otherwise."

David Cresp, director of office leasing at Colliers International, warned WA's high business costs, best illustrated by the fact that it is 30 per cent more expensive to build in Perth than in Melbourne, added risk to the local economy.

"WA and Perth are attracting massive amounts of gravity in terms of mining and Perth is now known as a world centre for mining but investment money will go elsewhere if cost overruns make WA riskier," he said.

"The drop in iron ore was a horrible shock and showed the need to squeeze efficiency out of things but the cost of new projects is also right up there."

With the focus now on buildings in the 10,000sqm to 20,000sqm range, Mr Cresp said office space supply was likely to come on in small chunks.

"The oil and gas sector has already leased some of the sub-lease space in the CBD and a lot will be taken up or withdrawn from the market in the first six months and by the end of 2013 the market should be back to normal."

Jon Smeulders, director of property development and investment at Georgiou Capital, which started work late last year on a $40 million office development in Innaloo, said developers had to contend with a smaller pool of prospective tenants when seeking leasing pre-commitments at large developments. "By necessity, the market has come back to smaller projects because of the need for pre-commitments to lock in project funding," he said.

With rents in West Perth and the CBD still the most expensive in the nation, a number of businesses that need to be close to the city but not in it, were well-served by fringe office markets.

Jay Hardison, the manager for property and economic development at the City of Belmont, said that since 2010, 17 new offices had been built in Belmont - 27,500sqm of new space.

"We are seeing a lot of growth in smaller buildings where it is easier to get pre-commitments and finance and in some cases, they can be self-financed," he said.

"Rio, Fortescue and Hancock Prospecting have built or are building offices in Belmont.

"While they will always have Terrace address for their executives, it makes good economic sense to move their non-executive staff out of the CBD."

Many miners have reassessed their costs."

Macquarie's Lee Bowers

The West Australian

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