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Office fringe markets in Sydney and Melbourne outperform CBDs

Property Markets / Outlook

Australia / Sydney

Apr 14 2018

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Office fringe markets in Melbourne and Sydney recorded stronger rental and capital value growth than their respective CBD markets in the 12 months to March 2018, according to Savills Australia’s latest research.

Sydney and Melbourne CBD office markets have been the prime beneficiaries of strong economic growth and investor interest throughout the past two years, with world-leading office market performance and capital value and rental growth consistently among the top 10 across all international markets during this period. 

Shrabastee Mallik, Savills Australia’s senior analyst for Capital Strategy, said it appeared that investors were now being priced out of these CBDs and their focus had turned to the relatively more affordable neighbouring fringe markets, which enjoyed similar market fundamentals. 

“A continuation in strong economic conditions is likely to positively affect the office fringe markets in Sydney and Melbourne, with labour market indicators particularly strong for New South Wales and Victoria,” she said.

“A resurgence in full-time employment growth, in conjunction with steady growth in professional job advertisements in these states, will likely have a continued positive effect on these office markets.”

The agency’s National Office Quarter Time report highlights capital value growth in the Sydney CBD office market at 14.0 per cent in the year to March 2018, while North Sydney recorded capital value growth of 20.0 per cent, Macquarie Park recorded 27.3 per cent and Parramatta recorded a stellar 36.8 per cent in the same period. 

“Similarly in Melbourne, while capital values in the CBD grew by 6.4 per cent over the year to March 2018, the St Kilda Road office market recorded capital growth of 19.3 per cent in same period,” she said.

The report states that although yields continued to fall further in Sydney CBD and Melbourne CBD in the 12 months to March 2018, this had been at a more muted level than in previous annual periods.

“Investor interest in fringe markets was even more evident throughout the past six months, with yield compression more pronounced in fringe markets than in the CBD markets,” Ms Mallik said.

“While A-grade market yields fell by 45 basis points in Sydney CBD, comparable yields in North Sydney and Parramatta fell by 100 basis points, and by 65 basis points in Macquarie Park over the same annual period.”

Ms Mallik said that rental growth was more than double in Sydney's fringe markets compared to the CBD, although this could partially be attributed to a distinct lack of space in Sydney's CBD, with ongoing withdrawals affecting total available space for lease. 

“This is also one of the main drivers of occupiers focusing their attention out of the CBD,” she said.

Ms Mallik said that a lack of contiguous space in the CBD meant that lessees were looking north, with an increasing trend in occupiers splitting up their operations to have space outside of the CBD, most dominantly in the neighbouring North Sydney market. 

Net effective rents grew by 24.5 per cent in North Sydney and 22.9 per cent in Parramatta in the year to March 2018, compared to 10.4 per cent in Sydney CBD's office market in the same period. 

“This rental growth was as a result of rising rents and falling incentives,” Ms Mallik said.

“For the first time on record, A-grade net incentives in Parramatta and North Sydney were lower, on average, than in the CBD. 

“Similarly, net effective rents grew by 22.0 per cent in the St Kilda Road office market in the year to March 2018, compared to 11.8 per cent in Melbourne CBD.”

Photo by Seb Zurcher on Unsplash

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