OPINION: WITH spectacular projects like Barangaroo about to change the city skyline, the Sydney commercial property market looks set to bounce back in 2014. Lower interest rates are boosting investor confidence in property as a safe haven and generating higher CBD office sales.
Tenants are also moving into the CBD due to increasingly affordable rental prices and a large number of available options, according to a report on Australia and New Zealand for 1H 2013. In particular, tenants from the North Shore have begun moving into the CBD.
New commercial property supply is set to come on stream in 2015 with Lend Lease’s $6 billion Barangaroo development on Sydney Harbour, one of the biggest leasing undertakings in Sydney for the past five years. About 300,000 sqm of office space is available and 23,000 people will live and work there. The first commercial leasing agreements have been signed and Lend Lease, Westpac and financial services firm KPMG, the main tenants, will move in from 2015. A major reshuffle of Sydney CBD tenants is expected to occur in 2015 as corporates leave their current city premises and it’s expected that the commercial heart of the CBD will now gravitate towards the western and northern end with the water views.
Leasing is expected to improve in Sydney’s CBD in 2014 on a brighter employment outlook, with A-grade rental growth forecast to reach to 6.4 per cent in the CBD in 2014, after contracting by 1.7 per cent in 2013. A slow rebound starting in 2014 for the finance, insurance and business services sectors, driven by low interest rates, is expected to support employment growth across the CBD.
After a flat year in 2012, rents are expected to grow in 2014 as vacancy rates tighten further. CBD vacancy rates fell in the year to January 2013 from 9.7% to 7.2% and face rents grew by just 2.5 per cent in 2012.
After lackluster activity in 2011, when the Sydney CBD Strata office market saw its lowest sales for the last decade, investors in 2012 found the Sydney CBD an attractive proposition once more. Twenty-one properties worth nearly $1.4 billion changed hands over the year, driven by a strong upsurge in interest from domestic buyers.
Key purchasers were DEXUS, which acquired $472 million worth of Sydney CBD office assets in 2012. The trend is continuing in 2013, with Mirvac, Australia’s third-biggest diversified property trust, set to buy five offices in Sydney.
Encouraged by the low interest rate environment, super funds, high net-worth investors and sovereign funds appear to be returning to the real estate investment trust sector in a move towards higher- yielding investments. Bond yields rose to a record 4.21 per cent in Q3 2012, when the 10-year bond rate reached 2.7 per cent. Domestic institutional investors have moved into acquisitions mode on the back of favourable borrowing conditions and stronger balance sheets, after paying down debt in the years after the GFC.
With the value of sales up 45 per cent in 2012 on the previous year, the Sydney CBD strata office market in 2012 showed recovery from the 10-year lows of 2011, another report shows. But capital values increased only slightly by 1.7% to a current total market average of $5,122 per sqm.
The sales growth reflects stabilising economic figures and the perception of improved confidence in the market, as interest rates hit historical lows, the report says. Another key indicator pushing up prices in Sydney’s CBD has been increased activity by Self-Managed Super Funds as they look to take advantage of favourable tax benefits and the property lull experienced in 2011.
This upsurge in interest in the CBD reflects interest in the wider Sydney market. Commercial property sales reached a five-year high in 2012 in the metropolitan property market in Sydney (non-CBD centres such as North Sydney, Chatswood, Parramatta and Rhodes).
In addition to this, about $1.22 billion worth of Sydney metro office assets changed hands in 2012 – the highest volume since 2007. Strong investment activity levels have carried over into 2013, with more than $160 million worth of metro office sales transacting in the first quarter.
Parramatta is also popular, with commercial property sales rising strongly to $276.1 million in 2012, up from $95.1 million in 2011. The largest sale in 2012 in Parramatta was Eclipse Tower at 60 Station St, selling in November for $167.5 million to the Retail Employees Superannuation Trust (REST).
Information obtained from Colliers’ CBD Office and Metropolitan Office Research and Forecast Report FH 2013, and Knight Frank Office Market Overviews for 2013.
*By Hamish Mackay.
About author
Hamish Mackay is an Associate Director at Tim Green Commercial. His main focus is on commercial leasing opportunities in the CBD, and he was nominated as agent of the year in 2006 for DBRREEF (now Dexus).
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