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Centuria upbeat as pandemic-hit office sector sits on knife edge

Net absorption of space continues to deteriorate in both Sydney and Melbourne, office values are falling, vacancy is increasing across the country and net effective rents are declining, it told clients in a note on Tuesday.

“With demand to remain negative in the short term, supply still to come and increase in sub-lease space, net effective rents will remain under pressure,” its analysts said.

Worryingly, Sydney’s vacancy rate has hit 10.2 per cent, Melbourne’s is higher, at 11.3 per cent. Not too long ago, they were 3.7 and 3.4 per cent respectively.

“This is prior to assessing any structural impacts that work from home may have on future demand. We remain cautious on the cashflows for listed office REITs,” Macquarie maintains.

In another ominous sign, the impact of COVID-19 on investors buying and selling office towers cannot be discounted.

Colliers International’s most recent Capital Markets Outlook notes that after a record year in 2019, where sales in both metro and CBD office markets totalled $25 billion, volumes plunged dramatically this year to September, down 75 per cent to $4.3 billion.

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“The uncertainty around future occupancy levels, together with strict domestic and international travel restrictions halted a majority of capital investment flows,” Colliers said.

Australia’s office sector has been hammered by strict work from home regulations designed to counter the global pandemic, leaving city CBDs looking like ghost towns for much of the year.

The concentration of Centuria Office’s portfolio in suburban locations, plus a tenant mix skewed to government, listed or multinational companies, has helped it ride out the pandemic.

During the three months to June, the fund provided $2.4 million in relief to tenants, a figure it managed to halve over the following three months to September, down to $1 million.

Net effective rents will remain under pressure.

Macquarie analysts

The $1 billion listed fund reported a slight dip in occupancy, to 96 per cent, across its multiple office towers, a result it attributed to Foxtel surrendering its lease in its Robina town centre building in Queensland.

Foxtel paid a surrender fee equivalent to the rent payable to June this year allowing the REIT to move early on re-leasing the building while still getting income, fund manager Grant Nichols said.

“Despite the ongoing impacts from COVID-19, we continue to generate a solid amount of leasing activity.”

A key question for office landlords during the pandemic is how or when businesses will require staff to return to their workplaces.

Mr Nichols said the trend to re-occupy city buildings is underway.

“The medium to long-term outlook for high quality office assets remains positive, as evidenced by strong recent investment sales .. and the growing trend of tenants returning to office space,” he said.

But Macquarie said it expected negative demand for office space over the remainder of this year, a slowdown driven by the slump in global economic activity and people’s ability to continue working from home.

The group anticipates rents will continue to soften on a net effective basis driven by rising incentives. Some geographies, like Sydney, will also see declines in face rents.

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