Trouble in paradise?

Published:
06 Sep 2010
Author:
Bob Wilson
Source:
Property Australia

The Gold Coast has long been a Mecca for sun-seeking travellers from colder parts of Australia, as well as from New Zealand, Europe, the UK and a range of Asian countries.

The great surf and swimming beaches that dot the 40km long strip of sand between Southport and Tweed Heads attracted 3.1 million Australian holidaymakers alone in the 12 months to March 2010.

According to Tourism Queensland, Australians spent a total of $3.9 billion on their trips to the region.

But the Gold Coast’s holiday makers, while enjoying the beaches, the mild winter weather, the theme parks and World Heritage hinterland rainforests, would largely have been unaware of how much impact the global financial crisis had on the region’s underlying economy.


Office

According to the Property Council’s latest Office Market Report, the Gold Coast market reported the country’s highest office vacancy rate at 23.4 percent – and the highest for this market in 15 years. Vacancy rose from 22.4 percent over the six months to July 2010.

The increase was driven by supply additions of 2267sqm over the period, and net absorption was -2808sqm for the half-year.

Colliers International Gold Coast director Stewart Gilchrist bluntly described the office market as “terrible” for owners and investors. Gilchrist says the market is vastly over-supplied.

“On the other hand, it is a Godsend for tenants,” Gilchrist says. “Rents have come off and there’s some big incentives being offered. Demand for office space has not been high, but I expect it to increase, purely because of the great deals being offered.”

The future supply stats are daunting: at least 100,000sqm of unoccupied floor space and a further 8120sqm of office space due to come on-line in the second half of 2010, with only 23 percent of this space pre-committed.

CB Richard Ellis (CBRE) senior director – office services Tania Moore agrees it is a tenant’s market and there are some large space requirements in the wings.

“Incentives of 25 to 30 percent plus are being offered in the new buildings in order to deliver a complete fitout for the tenant,” Moore says. “Existing buildings are offering incentives of between 15 and 20 percent with fitouts included.”

Moore says the market conditions have persuaded some tenants in Southport Central to become owner-occupiers, buying their own strata office units for $2500 to $3000 a sqm instead of paying rent.


Retail

Shopping centre owners and developers appear to have avoided the scale of over-supply that plagued the office market.

There was only 36,000sqm of new retail space added in 2009 and another 20,000sqm or so is expected in 2010. Most mooted developments in the northern growth corridor between Brisbane and the Gold Coast have either been delayed or scrapped.

Knight Frank says occupancy rates in retail centres have remained strong (most exceeding 90 percent). However, rental growth has remained flat for the past two years, with retail sales turnover in specialty stores soft across the board.

Knight Frank Gold Coast managing director Tony Tooma says that, although customer count has remained constant with some centres even showing steady increases, the Gold Coast has not escaped the lower discretionary spending trends in the Australian economy.

Tenant demand generally has been solid in the Surfers Paradise retail precinct, although the secondary locations remain difficult to lease. CBRE’s latest MarketView report says the overall vacancy rate has been kept low by the redevelopment of Dolphin Arcade and Raptis Plaza, a process that removed 11,500sqm from the equation. Rents on ritzy Cavill Avenue and other main street locations were maintained at $2000 to $2400 a sqm.

Rents at Main Beach and Broadbeach, however, have dropped about 30 percent in recent months, below $1000 a sqm. CBRE’s Mark Witheriff described the leasing market in the prestige, high fashion sector as “very soft”.

Private investors have been active in the ‘bread and butter’ retail sector. Savills sold three supermarket-anchored centres for a total of more than $60 million in the past 12 months and has another in the pipeline. Savills divisional director – retail sales Peter Tyson says there has been steady activity in the grocery-based shopping centre sector and fair turnover for quality assets, “but it is slower for the secondary market”.

Signals are mixed at the big end of town, with the up-scale Marina Mirage shopping centre now in receivership after a proposed $90 million sale fell over.

Brisbane-based fund manager Cromwell Property Fund took the best part of a year to sell The Forum, a retail and office complex on Orchid Avenue. It eventually sold in July 2010 to EG Funds Management for $42 million.

Sam McVay of McVay Real Estate, who negotiated the sale of The Forum in conjunction with CBRE’s Mark Witheriff, says the sale, which followed two failed contracts, was a sign the market was coming back.

“The Gold Coast is a very cyclical market – it always gets over-bought and over-sold,” McVay says. “We think investors have begun to realise the market has bottomed.”

Knight Frank’s Tony Tooma says the sales of the Le Boulevard building, The Forum, Paradise Resort and other nearby properties in Surfers Paradise, totalling more than $100 million in the past six months alone, signalled the return of Sydney and Melbourne investors to the Gold Coast market.


Industrial

Prior to the onset of the GFC, developers and investors had big ideas for Yatala, a vast swathe of englobo land and fast-developing new industrial estates located on the M1 Motorway, mid-way between Brisbane and the Gold Coast.

Now, however, Yatala has stalled, with land prices falling dramatically. Analysts say there has been far too much speculative building, particularly strata title units. Few developers are keen to proceed with new projects because of funding and affordability issues and there is a widening gap between market expectations and the rents needed to make a project viable.

According to valuer LandMark White, the investment market has largely disappeared, except for private investors seeking quality property in the sub-$5 million category.

Owner-occupiers have retreated from the market and land sales have stalled, largely because owners are reluctant to sell at current levels. At Yatala, englobo land prices have plummeted from $100 a sqm to less than $50 a sqm, while serviced land prices have dropped from a range of $300 to $350 a sqm to a range of $200 to $230 a sqm.

LandMark White Gold Coast industrial valuer Prue Look says rents have come back from $110/$115 a sqm to $100 a sqm across the board. Look says the situation is less serious in the traditional industrial estates where the supply and demand equation is more in balance. She adds that investment sales of freestanding buildings with good tenants is the one area of the Gold Coast industrial market that is performing comparatively well, with yields ranging from 8 to 8.5 percent.


Hotels

The GFC has chewed into the Gold Coast’s tourism numbers and expenditure since mid-2007, amid tightening credit conditions. The latest Midwood Report shows total visitor nights for Gold Coast (both domestic and international) fell by 5 percent in calendar year 2009. Expenditure was down by 5 percent for domestic visitors and 6 percent for international visitors.

Gold Coast accommodation takings were down 4 percent and room rates by 3 percent between the December quarters of 2008 and 2009. Midwood Report author Bill Morris of Prodap says each of these statistics was worse than the Queensland averages.

“Over the past 10 years, hotel room rates on the Gold Coast have increased at only the rate of inflation, that is, there has been little growth,” Morris says. “Current average annual income per room is only $40,000 for hotel establishments with more than 15 rooms. Most flats and apartments should have performed better than this.”

The Gold Coast is the third largest tourist accommodation centre in Australia, comprising hotels (47 percent), serviced apartments (41.8 percent), and private holiday homes and apartments (11.2 percent).

A new Market Snapshot from Jones Lang LaSalle Hotels (JLLH) says Gold Coast hotel room supply declined by 1.3 percent in 2009, despite the October opening of the 192-room Azzura Surfers Paradise Hotel.

“This highlights the volatility of Gold Coast room supply as apartments move in and out of rental pools,” the report says. There are 309 rooms under construction, which will increase existing hotel stock by 2.4 percent over the next few years.

But JLLH says development finance is proving exceptionally difficult to obtain and the re-financing bottleneck is likely to lead to an increase in “guided asset sales”, as banks work with clients to reduce leverage and exposure to risk.

The JLLH report says the relatively static room supply over the past five years has benefited the hotel market, with occupancy levels averaging 68.6 percent. Average daily rates have increased by 4 percent per annum since 2004 to $133 in 2009, although below the 2008 peak of $136.

Bill Morris says Gold Coast tourism marketing is under-funded (limited to $10 million a year), and advocates a tourism tax, such as those levied in most European countries, the US, Bali and Fiji.

“A tourism tax of only 5 percent would raise approximately $30 million per year, or 10 percent could raise $60 million for marketing and promotion of our city,” Morris says.

“This would add only $7 to $14 to nightly room rates, paid by the consumer. Other tourism operators could also add a tourism tax on top of their entry or product fee to ensure all tourism businesses contributed to funding.”


Room for optimism

While this seems to be a poor report card for the glitter strip, Knight Frank’s Tony Tooma says the Gold Coast economy is enjoying underlying growth based on interstate migration of some 15,000 people per year.

“While building activity has been subdued over the past two years, there is strong evidence of a string of new residential projects in planning, which will be launched over the next 18 months,” Tooma says. “As a result, this will provide job stimulus and renewed demand for commercial space.”

Trident Corporation director, Marcus Gaffney, whose company owns several office buildings on the Gold Coast, has an optimistic outlook for the besieged office sector. Gaffney expects that Trident’s Corporate Centre Two can move from 30 percent occupancy to about 90 percent by the end of 2010.

“Sixty per cent of the (Gold Coast) market is strata title and configured for tenancies of less than 500sqm,” Gaffney says.

“There are only five options in the market for the large space requirements, so it would not take much to turn the situation around.”