Office Leading Indicators feel good to Dexus

2 February 2021

Dexus Research today released the Australian Real Estate Quarterly Review Q1 2021. This report describes the outlook for Australia’s main property markets.

Peter Studley, Dexus General Manager, Research said: “Australian property markets are well positioned going into 2021 with fiscal stimulus translating to better than expected economic and employment data.

“After an uncertain year for office markets, an improvement in many of the key leading indicators signals a period of strengthening demand ahead.

Office demand is generally correlated to white collar office employment and Dexus reports, the signs for this appear positive with a strong return to growth (see below).

The report does also confirm that office building occupancy levels (the proportion of people actually in the office on a daily basis) remains
below pre-COVID levels at the end of 2020, with Government guidelines, multinational sentiment and concerns about public transport the biggest deterrents.

Dexus have reported that vacancy rates have generally risen with a number of tenants putting surplus space on the market as a sublease, increasing the recorded vacancy rate. The total vacancy rates in Sydney and North-Sydney saw the largest gains past quarter, rising to 11.9% and 19.1% respectively, partly a reflection of recent supply additions yet to be absorbed.

The current saving grace to values is that the cost of debt remains low and there remains a strong offshore appetite for quality Australia real estate assets.

“Capital flows into property are likely to remain strong during 2021 given the low interest rate thematic. The wide yield spread in favour of property is expected to support investment demand for real assets for the foreseeable future.”, said Dexus

Our Views

The Dexus report confirms our view that despite the growth in white collar employment, the use of office space continues to be lower than pre-COVID and that this will cause a large number of corporate groups to rationalise their requirements for CBD space as soon as permitted.

We expect sub lease space to push much higher in the short term following actual vacancy rates and incentives in the medium term.