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Falling incentives and investment boost drive growth in Sydney office market

Property Markets / Outlook

Australia / Sydney

Nov 26 2018

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NSW’s office market has recorded its second strongest sales period in a decade, with a $2.7 billion investment injection in the third quarter set to drive further yield compression by the end of 2018. 

CBRE’s latest Office MarketView report highlights that in the three months to September 2018, $4.5 billion worth of office assets changed hands nationally, with NSW accounting for 52% of the sales activity. Brisbane saw the second highest level of transaction activity at $1.2 billion, followed by Melbourne with $746 million. 

In Sydney, sales activity was driven largely by domestic demand, with Australian-based buyers accounting for 77% of transactions, while offshore investors contributed 23% ($567 million) of the total volume. 

Sydney CBD yields remained stable during the quarter at 4.75%, however, further compression is expected by year-end, fueled by tightening market conditions and strong investor demand. 

CBRE NSW State Director of Capital Markets, Michael Andrews, said the Sydney office market continued to attract significant interest from both domestic and offshore investors due to its strong performance over a number of years, comparatively strong yields and global standing. 

“An increase in M&A activity, including the fight for the Investa portfolio, is testament to the high level of demand for office investments, especially Sydney offices. The weight of capital seeking a home in Sydney, but also the lack of purchasable stock available, will continue to push up prices in the short to medium term,” Mr Andrews said. 

“There is still significant depth of global capital chasing large, high profile investments, in the Sydney CBD and markets like North Sydney and Parramatta at aggressive prices.” 

CBRE Associate Director, Research, Felice Spark, said strengthening economic and employment conditions in NSW were supporting growth in the office market. 

“Sydney continues to outperform in 2018, with limited new supply in conjunction with high levels of withdrawals in the CBD helping drive consistent falls in vacancy across the major office markets of North Sydney, Macquarie Park, Parramatta and the CBD,” Ms Spark said. 

“This is placing downward pressure on incentives and is likely to drive further yield compression of around 25 to 30 basis points by the end of the year.” 

During the third quarter, Sydney’s office market experienced 3% rental growth – fueled largely by a sharp decline in prime and secondary incentives by 170 basis points and 90 points respectively. 

Stefan Perkowski of CBRE’s North Sydney office leasing team said rising rents in the Sydney CBD was driving a surge in demand from occupiers looking to migrate to North Shore markets. 

“With secondary grade CBD rents continuing to rise, there is a flight to quality from tenants that are attracted to North Sydney’s more affordable pricing and proximity to the city. It offers CBD premium grade quality at rentals 30% comparable Sydney CBD opportunities.” 

Mr Perkowski said the recent leasing success at 1 Denison Street highlighted the strengthening appeal of North Sydney’s office market. 

“On the back of Nine Entertainment being announced as the anchor tenant of Winten Property Group’s 1 Denison Street tower, there has been a strong increase in enquiry in North Sydney from prospective tenants that see value in being close to the media corporation,” Mr Perkowski said. 

“SAP’s commitment to occupy the building upon its relocation from Aqualand’s 168 Walker Street tower is a further boost for North Sydney.” 

Mr Perkowski said the conversion of 168 Walker Street tower to residential would also have a wider impact on driving downward pressure on vacancy. “With all tenants needing to vacate by the end of 2019, and no backfill story, there is a further 7,000 sqm of office space in the North Sydney market that could be absorbed over the next 12 months.” 

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