Perth is approximately 3,300 km from Sydney. For those of us based on the Eastern Seaboard of Australia – it can feel even further away. Indeed – at approximately 3,000 km – Perth is closer to Jakarta than Sydney.

The resource sector is the locomotive of growth in the Australian economy. As a result, Western Australia is now the heart-beat of the domestic economy. In an earlier blog – Perth: A Resource Boom, my colleague – Hugh Peacock – quantified the size of the upcoming resource projects – the numbers are impressive. Western Australia’s share of national output has already increased from 12.8% in 2001 to 15.1% in 2011. By 2021, the Western Australian economy is projected to account for 15.6% of Australia’s output.

The resource sector and those associated with the resource sector have been aggressive in their expansion plans. This is having a positive impact on the demand for office space. In 2010, the Perth CBD recorded 100,000 sqm of net absorption – the first time in Jones Lang LaSalle’s 40-year time series for the Perth market. 2010 was meant to be Perth’s annus mirabilis. However, the demand for office space gathered momentum and we recorded net absorption of 109,400 sqm in 2011.

Consequently, the vacancy rate in the Perth CBD was pushed down to 2.5% in 4Q11 and prime gross effective rents increased by an impressive 20.5% over 2011.

The strong growth in rents has flowed through to capital values. At the same time as Western Australia’s share of national output is rising, Perth’s share of CBD office market capital stock is increasing. In 1997, our bottom-up analysis showed that the total capital stock of Australian CBD office markets was AUD 38.4 billion. Perth’s share was 5.7%. In 2011, the total capital stock had increased to AUD 106.2 billion, but Perth’s share is now 11.6%.

Many real estate fund managers in Australia benchmark their performance against indices that reflect the relative size or value of the national markets. Whilst the Perth office market is growing in relative size, it is historically a volatile market due to its exposure to the mining and energy sectors. The volatility of returns in Perth is almost twice what was recorded in Sydney and Melbourne over the past 15 years. Volatility impacts Perth’s ranking on measures of risk-adjusted performance and makes the timing of the entry – and more importantly exit – strategy critical.

Previously, the Perth office market was too small a market to have a major impact on the overall performance of a fund. But with Perth’s share of CBD office total capital stock at 11.6% and forecast to rise over the next ten years, fund managers now require a clear investment strategy for their weighting to the Perth CBD office market. With the commodity boom likely to continue for at least the next few years, portfolio investors who ignore the Perth office market run the risk of under-performing. Fund managers no longer have the luxury of confining their activities to Australia’s Eastern Seaboard.

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