3 property stocks to watch

Five of the six CBD office markets are recording double-digit office vacancy rates. Is there an opportunity?

As reported in today’s Australian Financial Review, the vacancy in Australia’s CBD towers is at its highest level since 1999, jumping to 11.3%. Five of the six CBD office markets are recording double-digit office vacancy rates.

The vacancy rate in the major cities began climbing in 2011 when businesses stopped hiring and began consolidating. The 11.3% national vacancy rate for the September quarter is up from 8.5% in the same period in 2012 and 7.5% in 2011.

Jones Lang LaSalle research for the three months to September indicates that Brisbane fared the worst, with a vacancy rate of 14.5%, the city’s highest level since 1993. Next in descending order are Adelaide (13.1%), Canberra (11.4%), Sydney (10.7 %), Melbourne (10.5 %) and Perth (9.4%)

Jones Lang LaSalle’s head of office leasing, Tim O’Connor, said corporate Australia was still very cautious on committing to new space and lease negotiation periods were longer than usual. It meant a tough environment for landlords. He believed that leasing would remain challenging through to next year.

Additionally, Citigroup analysts issued a report on softening rents at suburban malls, where the primary landlords are  Westfield Group (ASX: WDC) and GPT Group (ASX: GPT) The rent increases over the next three years will be around 2%, compared to increases of between 4% to 5% over the past few years.

Stocks to watch

  • Dexus Property Group (ASX: DXS) specializes in owning, managing and developing office, industrial and retail properties. Recently it has increased its office exposure by teaming up with Canada’s Pension Plan Investment Board to take over the real estate investment trust Commonwealth Property Office Fund (ASX: CPA).
  • Federation Centres (ASX: FDC), formerly Centro Retail Fund Australia, is a vertically integrated Australian retail trust that specializes in the ownership and management of Australian shopping centres.
  • GPT has a large exposure to Australian retail via its portfolio of 17 shopping centres and its interest in its Wholesale Shopping Centre Fund.

Foolish takeaway

The current economic environment is reducing both the demand for office leasing space and limiting rent increases for retail landlords. Considered in isolation, this may lead investors to trim their property holdings.

However, either an increase in business investment spending or the continuation of demand from overseas investors would provide positive momentum for the sector. The current high yields available in the sector also lend a measure of support.

As a result of the abovementioned contrary views, it’s recommended that investors keep an eye on macroeconomic factors as well as ongoing trends in underlying demand for office and retail property.

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Motley Fool contributor Mark Woodruff does not own shares in any of the companies mentioned in this article.

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