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White collar jobs drive office growth

Depreciation can benefit cash flow in a changing commercial sector

It’s no secret that New South Wales and Victoria are experiencing significant population growth, largely fuelled by migration.

While this is notoriously increasing housing demand, particularly in Sydney and Melbourne, it’s also leading to growth in white collar jobs and this boom is driving the need for office space in these capital city locations.

According to Deloitte Access Economics there will be an additional 5,600 office workers in the Sydney CBD over the next twelve months and 6,121 additional workers in Melbourne.

This trend is having some interesting effects on the demand for commercial offices.

Firstly, in Sydney and Melbourne CBD locations, there is more demand than ever for this type of asset. But supply is not keeping up, resulting in an increase in rent in these locations due to greater competition.

According to Colliers International, the average premium grade net rents now exceed $1,000 per square metre, well above historical averages.

Despite moderating sentiment, based on the NAB’s Commercial Property Index during the third quarter of 2017, office buildings are tipped to generate the best rental returns throughout 2018.

Elsewhere in Australia, office markets look quite different. In Brisbane, Adelaide and Perth there is plenty of available stock and many companies are taking the opportunity to move their headquarters to more central CBD locations.

In contrast, businesses in Sydney and Melbourne are looking outwards to fringe locations due to the lack of space and increasing rents. As a result, areas such as North Sydney and Parramatta are continuing to grow as core office locations.

Investors are also looking towards the outer east in Melbourne for similar reasons. In fact, Colliers International has found that Sydney and Melbourne City fringe markets are leading the way for rental growth.

While it is somewhat of a mixed bag around the country, one thing remains consistent. Owners of office buildings and their tenants need to maximise their depreciation deductions to improve their cash flow and remain competitive.

The table featured shows the difference that claiming depreciation makes for an investor who owns this type of commercial property.

In this scenario, the office building was purchased for $820,000 and rented for $1,050 per week ($54,600 per annum). Expenses for the property including interest, rates, property management fees, repairs and maintenance totalled $57,088. Without depreciation, the investor is experiencing a loss of $34 per week.

The typical depreciation for this type of property would be $40,080 in the first full financial year.

Commercial office building purchased for $820,00
Without depreciation claim
Annual expenses $57,088
Annual income ($1,050 x 52 weeks) $54,600
Pre-tax cash flow (income – expenses) -$2,488
Total taxation loss -$2,488
Tax refund (total taxation loss x tax rate of 30%) $746
Annual costs of the investment property (pre-tax cash flow + refund) -$1,742
Weekly cost outlay -$34
Depreciation claim of $40,080*
Annual expenses $57,088
Annual income ($1,050 x 52 weeks) $54,600
Pre-tax cash flow (income – expenses) -$2,488
Total taxation loss (pre-tax cash flow - depreciation claim*) -$42,568
Tax refund (total taxation loss x tax rate of 30%) $12,770
Annual costs of the investment property (pre-tax cash flow + tax refund) $10,282
Weekly cash return $198
Depreciation difference = $232 per week

Assumptions and disclaimer

The depreciation deductions in the above scenario have been calculated using the diminishing value method and are based on the income and expenses involved in holding the property only. An annual turnover of more than $25 million is assumed.

By claiming depreciation, the property owner improved their loss of $34 per week to a return of $198 per week. This improved their tax refund by $12,024 in the first full financial year.

To learn more about depreciation claimable for office buildings or any commercial property contact one our depreciation experts on 1300 726 726 or visit the BMT website today.