Sydney CBD office landlords to hold more power from 2013: Jones Lang LaSalle

Owners of prime office space in the Sydney CBD should be in a better bargaining position from 2013, according to the latest global real estate report from Jones Lang LaSalle (JLL).

The prime Sydney CBD office market is forecast to transform from one favouring tenants in 2012 to a balanced market in 2013 and 2014, with both capital values and rents expected to rise by as much as 5% over the course of 2012.

This places Sydney in the middle range of performance forecasts for major CBD office markets – alongside London, Paris, Los Angeles, Mumbai and Frankfurt.

In the Asia-Pacific region, Beijing is set to be the strongest-performing prime office market over 2012, with a forecast 20%-plus rise in rental values and ma rise of between 10% and 20% capital growth.

Hong Kong and Singapore rental values are forecast to fall by as much as 20% over 2012.

In its Global Market Perspective Third Quarter 2012, JLL places Sydney in an upward cycle with both rents and capital values rising.

The report makes passing reference to Perth, noting that the “commodities sectors continue to support robust rental growth in markets" such as San Francisco and the WA state capital.

Perth is also a market “showing healthy levels of corporate activity”, according to Jones Lang LaSalle.

The report says that economic uncertainty continues to affect investor sentiment across the globe, with deals taking longer to close.

It says the market remaining polarised with investors steering clear of risky assets, focusing instead on prime product in core markets like London, Paris and New York.

According to JLL, Sydney has performed modestly in relation to other prime capital city office markets, recording capital growth of 1.5% over the second quarter of 2012, matching the growth of regional competitors Tokyo and Shanghai, but well behind the top-performing CBD markets of Jakarta and Beijing, where capital values grew by between 9% and 11% over the quarter.

However, Sydney strongly outperformed CBD markets in Europe, which managed capital value growth of just 0.4% over the quarter, following the decline of 0.3% in the first quarter of the year.

Sydney is offering a prime yield of 6.9% and has a relatively high vacancy rate of 8.7%.

Comparative regional markets such as Singapore has a prime yield of 3.6% and a vacancy rate of 10.2%; Tokyo has a prime yield of 3.6% and a vacancy rate of 3.5% while Hong Kong has a prime yield of 3.1% and a vacancy rate of 3.4%.

The report notes that in contrast to many offshore markets, prime yields in Australia have not followed bond yields downwards.

“As a result the yield spread to bond rates is at record levels in most markets, providing a high measure of valuation support should bond yields revert to long term levels,” says Simon Storry, head of office investments Australia for JLL.

“With a global hunt for yield, Australian real estate assets are sharply differentiated on a valuation basis.  In addition, spreads between prime and secondary yields are generally wide, providing an incentive to owners and investors to refurbish and reposition assets,” he says.

Storry says that during the second quarter of 2012 a renewed cycle of financial market volatility saw leasing activity slow in Australia.

“Rents in many office, retail and industrial markets flatlined.

“In the Sydney CBD market, contraction by some financial market tenants was offset by migration into the CBD.

“Across office markets, as in the retail and industrial sectors, a slowdown in demand for space is largely offset by a limited construction pipeline. As a result, vacancy rates remain low and downside risk to rents is limited. In the longer term, continued growth will stimulate another construction cycle.”