$4.5 billion on the market & no bite

THERE are over $4.5 billion of office assets up for grabs in Sydney but no one is biting, according to analysts.

And there might be a reason for the lack of activity.

JPMorgan said the short-lived dream run is over for office landlords and whilst total direct returns over the last three years to March 2008 have averaged 18% pa – higher debt costs and economic uncertainty are taking their toll.

“While strong fundamentals should ensure solid income returns, capital returns have already been impacted.

“June valuations have seen cap rates soften by up to 100bps, a big step considering the lack of transaction evidence. Even with a bunch (~$4.5 billion) of office assets on the market, buyers are scarce.

“According to our records, there have been no major Sydney CBD sales agreed so far this year!” JPMorgan said.

PIR Independent Research Group’s managing director Richard Cruickshank said the lack of activity could be due to buyers sitting on their hands.

“Buyers are managing by despite the current credit crisis and they want to buy but they are waiting because they think for properties will to get cheaper. But at the same time, buyers are not desperate to sell,” he added.

“In the past cycles, we had distressed sellers and willing buyers. But this time, we have willing sellers and buyers, but they are not distressed sellers.

“The market will need to strike a balance,” he continued.

A LandMark White research found over the 2007/08 financial year office turnover (over $5.00 million) across Sydney fell by 20.90% to $2.86 billion, with only 43 transactions recorded.

LandMark White found wholesale funds were the most active players accounting for 36.30% of turnover but is down by 39.44% from the previous year. Property trusts also accounted for $596.65 million, down $167.80 million from 2006/07.

Private investors were also more active spending $539.70 million up from $258.43 million, whilst developers also recorded an increase of 27.82% to $71.90 million. Owner Occupiers spent $43.85 million down 30.96% from 2006/07. Unlisted property trusts and syndicates were the least active over the year, accounting for only 1.27% and 0.41% of total turnover respectively.

Despite the fall in investment activity, foreign Investors saw the greatest improvement with the level of funds invested reaching $403.00 million, an increase of $329.00 million from last year.

Meanwhile, Melbourne transacted almost $1.9 billion in 50 sales. Sales in the 2007/2008 financial year were 80.22% higher on the 2006/07 results.

LandMark White said this is mostly attributed to the high level of volume in the St Kilda Road and Southbank markets where $339.15 million and $391.55 million was transacted, respectively. Southbank saw the largest sale for the year being the second stage of Freshwater Place at a value of $230.00 million to GPT Wholesale Office Fund.

Brisbane was another strong performer in the FY08, turning over $2.373 billion in 32 transactions up from $1.470 billion in the previous year.

However, the second half of FY08 has seen a lack of transactions with only eight totalling $391 million.

Looking ahead, JPMorgan offered gloomy forecasts for A-REITs overexposed to the Sydney office property market.

“The Sydney CBD which is by far the most highly represented city in REIT portfolios (av. 46% of Australia office exposure) recorded its first negative quarter of net absorption since December 2003. With 40% of the city’s workforce in the slowing finance and insurance sector we have reduced our five year rent CAGR from 8% pa to 2% pa.

“Brisbane, Perth, and Adelaide continue to benefit from the resources boom with average market rent growth of 28% over the last year.

“The Melbourne CBD expansion refuses to abate with healthy white collar employment growth and relatively cheap rents (market prime gross rents average $410 per sqm, compared to $740 per sqm in Sydney, and $850 per sqm in Brisbane),” JP Morgan added.

JP Morgan said the different CBD fundamentals and the quality of each trust’s portfolio are now more critical than ever.

“Sydney should survive rapidly cooling demand thanks to muted supply, but we see potential genuine problems looming for Brisbane and Canberra,” the analysts concluded.

Australian Property Journal