Office Demand in Perth, Brisbane to Slump, Morgan Stanley Says

Office vacancies will more than double and rents slump in Perth and Brisbane as mining investment slows and companies cut costs, Morgan Stanley said.

Vacancies in Perth’s central business district will surge to 17.5 percent in the next three years from 6.5 percent now, and Brisbane’s will soar by about 10 percentage points to 23 percent, analysts led by Sydney-based Lou Pirenc wrote in an e-mailed note today. Rents could drop by as much as 9.3 percent in Perth and 6.4 percent in Brisbane by 2014, the bank forecasts.

Falling commodity prices and rising costs have led to major resource producers including BHP Billiton Ltd., Rio Tinto Group and Woodside Petroleum Ltd., deferring or canceling projects. The Australian government forecast slower growth this month when it released federal spending plans for the fiscal year starting July 1 as the nation’s record mining investment boom peaks and growth in China, its largest trading partner, slows.

“As mining investment has been a robust source of white-collar employment growth in the past decade, we believe the associated unwind in investment in the coming years will adversely impact CBD office demand,” Pirenc wrote.

The mining investment boom, which is widely expected to peak this year, may have already reached its high point in 2012, according to the Morgan Stanley. With 27 percent of Perth’s city center work force and 18 percent of Brisbane’s directly or indirectly employed by the resources industry, the slowdown will weigh on office demand and the performance of landlords, the bank, which rates office property trusts underweight, said.

“Every REIT with office exposure generally has Perth and Brisbane exposure,” Pirenc wrote, adding that Investa Office Fund, Dexus Property Group and Commonwealth Property Office Fund will be most affected. “With fundamentals already difficult, we expect the slowdown in investment spending will place further pressure on office REITs.”

Morgan Stanley’s forecasts are based on an assumption that engineering and construction-related investment tied to mining and oil and gas industries will fall 40 percent in the next three years.

If resources investment slows by only 5 percent over the same period, vacancies would rise to almost 8 percent in Perth and 14 percent in Brisbane, Morgan Stanley said. They could surge to 20 percent in Perth and 25 percent in Brisbane if investment slumps by 50 percent, it said.

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