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Bayleys Research


WELLINGTON CBD COMMERCIAL OFFICES 2ND HALF 2006

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VACANCY CONTINUES TO FALL

Vacancy rates for Wellington CBD office havecontinued to drop as tenant demand has increased uptake of space across the CBD, according to the June 2006 Office Space Market Survey figures released by TelferYoung. There was a 0.79% decrease in vacancy in the half year to December 2005 and a further 1.08% decrease in the first half of 2006 to 7.14% overall vacancy. The Wellington CBD had a gross take up of over 157,000 metres square (m2) of space in the year to June 2006. The declining vacancy was assisted by the further removal of some buildings from the survey which are “off-market” for the time being and undergoing renovation.

However, the TelferYoung survey now includes the Centreport Harbour Quays buildings in its survey as part of the Thorndon district. This addition added some 15,000m2 of floor area to the survey with the remaining 11,000m2 of new space coming from expansions such as No 3 The Terrace and the former Deloittes building on Molesworth Street. Wellington reached a total floor area not seen since June 1999.

Further increases in the total floor area are expected with the Maritime Tower and Defence House nearing completion but not yet included in the survey. Bayleys Research expects to see the total floor area to continue to increase with a decrease in the vacancy rate possible as these additions are expected to be substantially leased upon completion. However, some reports, such as AMP Office Trust annual report, have indicated that leases are up for renewal over the next 18 months and some vacant space may re-enter the upper tiers of the market.

At present the middle tiers of the market, Good and Average, make up 73% of total office accommodation. These two categories also account for more than half of the vacant floor area with Fair grade vacancy accounting for another 22%. The quality of building services (air conditioning, lift size and speed, and availability of electrical and cable ducting) is lower in the Average and Fair categories which reduces tenant demand. These factors are contributing to ongoing difficulty in leasing the lower quality spaces, despite a market which is very tight for space, and lower quality buildings are being increasingly left behind.

Bayleys Research notes that reaching high occupancy during a strong part of the market cycle will provide good income returns into the future. Proactive landlords will continue to make the improvements necessary to reach high occupancy levels at a time when quality and character of space is driving tenant demand. In addition, the Wellington CBD office market has experienced strong demand for investment stock and the ongoing shortage of supply continues to keep yield rates at low levels. Some landlords may see an opportunity to improve their current holding through capital expenditure and subsequently realize their gains through asset divestment.

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