Rethinking The Australian Office

FINDINGS

IT IS RECOGNISED THAT THERE ARE SEVERAL FACTORS BEYOND THE QUALITY OF A BUILDING THAT CAN AFFECT ITS FINANCIAL PERFORMANCE. LOCATION, GRADE, PROXIMITY TO AMENITIES AND TRANSPORT HUBS ALL PLAY A ROLE.

The uplift in rents is due to higher face rents rather than tighter incentives. This shows that landlords are able to at least partially pass on the costs of investments in building through higher face rents to tenants. The benefits to investing in quality such as rental uplift and higher vacancy, were spread evenly between Sydney and Melbourne. Though in Sydney rents appear to be more sensitive to grade and in Melbourne amenity values, perhaps owing to a larger absolute rental premium of Grade-A over Grade-B in Sydney.

To isolate for the effects of a building’s quality on its financial performance, more than 300 permutations of models controlling for location (both Sydney vs Melbourne as well as submarket), building grade, amenity and connectivity value 1 as well as outliers were undertaken. The results show that a building’s quality has a substantial impact on its financial performance. Moving from average to superior building quality is associated with a 5% decline in a buildings’ vacancy and 7% increase in average net effective rents. This translates to a 12% increase in the net income of a building. Even if just modest improvements in building quality are undertaken 2 , this leads to a 2% decline in the vacancy rate and 3% uplift in effective rents.

How the benefits are distributed also show very interesting results.

The lower levels of buildings see greater rental uplift from an increase in building quality. This is true not only for relative uplift, ie the

Perhaps one of the most interesting aspects of the analysis is how benefits are transmitted.

INCREASE IN AVERAGE NET EFFECTIVE RENTS 7%

LOWER FLOORS SEE THE GREATEST FINANCIAL BENEFIT FROM INVESTMENTS IN BUILDING QUALITY

1 The Amenity and Connectivity Indices, created by Cushman and Wakefield, use leasing data for benchmarking. Scores are based on amenities (cafés, bars, restaurants, etc.) and transport stations within a 300-meter radius. 2 As measured by a one-unit increase in the NABERS rating of a building.

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CUSHMAN & WAKEFIELD