Incentives boost tenancy rates
Sydney Morning Herald
Saturday March 6, 2010
OFFICE landlords are confident the worst market conditions are behind them, yet they are not being complacent and are willing to offer incentives to lock tenants in.In the last two weeks of the reporting season covering the first half of the 2009-10 financial year, office owners and funds manager said vacancy rates had levelled out about 7 per cent across the board, with asset values at the bottom.But they all confirmed that lease incentive deals were still being offered in the form of free fit-outs, rental holidays and sometimes a car park thrown in for the boss.Incentives remain at up to 30 per cent of some lease contracts but that figure is diminishing as the rental markets improve.However, across all the listed trusts that reported and included incentive commentary, the average level was about 15 per cent, forecast to fall to a market average of about 10 per cent over the next four years.The manager of the Commonwealth Property Office Fund, Charles Moore, said that in the past six months, Australian labour market conditions had begun to show signs of recovery, resulting in unemployment rate forecasts being reduced.Mr Moore, whose fund owns the iconic 120 Pitt Street in Martin Place, known as the "money box" building, predicted the balance of power would shift back to landlords in the coming 12 months as leases expired and new contracts were settled."This positive trend has seen an improvement in business confidence, with companies now revisiting expansion plans for the future," he said. "We expect to see an improvement in tenant demand for office space across Australia, with vacancy levels peaking at lower levels than previously anticipated. We believe that we are close to the bottom of the office property cycle and most of the impact of negative revaluations has now been realised."Out of the CBD, the deals are even better, with landlords keen to be flexible to retain tenants.In South Sydney, one property owner, Chris Mavrocordatos, accepts tenants have many choices in the current climate."There is a need to provide a very good product," he said."Inevitably, you want your tenants to be successful and then they are more likely to pay rent on time and you're less likely to deal with headaches."So you have to think: 'How can we make it attractive to our tenant and make sure the tenant goes well?' Some ways are by offering sizeable rent-free periods and by contributing to capital costs."Mr Mavrocordatos said owners also aimed to keep return yields up as banks liked to see businesses with an 8 per cent to 10 per cent result. One site he owns is a radiology facility at 2/540 Botany Road. Property group Billicorp negotiated the lease terms and managing director Kristen Marsh said the tenant signed a three-year lease with three five-year options at the rate of $117,320 a year gross. Ms Marsh said as part of the lease, Mr Mavrocordatos decided to upgrade the power supply to the 400 amps a phase needed for the facility's equipment. This is a sizeable amount of electricity and a considerable expense to a landlord willing to bear the cost of implementing the infrastructure.Billicorp also acted as agent in the leasing of the Jetts fitness facility, next door at Shop 1, 540 Botany Road. It is also owned by Mr Mavrocordatos, who, apart from offering rental rates well below competing properties, conducted most of the building work and lowered costs to the tenant by using his own company's builders to do a fast fit-out.Nearby at the vast South Sydney Corporate Park, the owner and developer, David Hannan, has also offered deals to new tenants, one being the recent Australia Post fit-out."While there is positive revenue for a business, the job of the landlord is to be as flexible as possible," Mr Hannan said."If they're open with you about the possibility of downsizing and you both recognise the risk that in downsizing they may no longer be able to make revenue, a landlord may be more lenient and understanding."
© 2010 Sydney Morning Herald