CBD office rents to scrape the sky Turi Condon, Property editor...

CBD office rents to scrape the sky

Turi Condon, Property editor | July 09, 2008

AUSTRALIA'S cash-starved $75billion listed property trust (LPT) sector will delay or shelve big-ticket office towers and other projects -- leading to office rents surging by up to 30 per cent in the next two to three years, according to economic researcher BIS Shrapnel.

"All this (credit crisis) will do is delay new projects and lengthen the next upswing," said BIS Shrapnel chief economist Frank Gelber.

However, the market is yet to hit rock bottom.

Analysts are forecasting a dour profit reporting season next month with more write-downs in property values, profit downgrades and cuts to investor distributions.

Yesterday, the LPT index crashed to a new low after losing almost half its value (46 per cent) in the past year, with nearly 39 per cent slashed off its worth this year alone.

Dr Gelber argues the correction is a financial market downturn, not a property downturn.

While LPT shares are in freefall, Dr Gelber points out that office tower rents are rising and very few CBD buildings have empty floors.

But with values falling and borrowing costs blowing out, there is no money for new developments and future profits are being downgraded.

In March, investment bank JPMorgan said it expected that a large chunk of the $32.5 billion of development projects planned locally by LPTs would be shelved.

The scale of developments planned by Australia's LPTs had "never been matched", the investment bank said at the time.

The listed trusts had a total of almost $58 billion of work in the pipeline if their offshore plans were included.

The biggest was Westfield, with $18.4 billion of projects, followed by Goodman ($15 billion), GPT ($4.47 billion), Stockland ($3.4 billion), Dexus Property Group ($3.32 billion), Valad ($2.34 billion) and Mirvac ($2.2 billion).

Valad, Mirvac and GPT have since issued downgrades, with GPT this week slashing its 2008 earnings outlook 27 per cent.

Macquarie Bank head of property research Rod Cornish said the story was being echoed globally. "Around the world there will be hardly any construction," he said.

But in some cities, an oversupply of office space was looming. In London, there were already towers coming out of the ground, but in Sydney very few cranes were on the horizon, Mr Cornish said.

Mr Cornish noted that in Melbourne and Perth, 75 per cent of the new office supply already had tenants lined up, but the figure was only 40 per cent in Brisbane, where more towers were being built.

While there was less supply to worry about in Australia, the credit crunch had also taken the initial steam out of rents, he said.

BIS Shrapnel has forecast that office rents will grow between a negative 0.9 per cent in Canberra, where a rash of new buildings are being built, to 28 per cent in Perth during the next two years.

"There will be a property downturn at some stage, but this isn't it," Dr Gelber said.

Australia's LPT sector had been oversold based on the financial shock rather than the state of the properties themselves, he said.

"I think there are huge bargains emerging in listed property trust stocks," Dr Gelber said.