Sydney and Melbourne office markets treading firmer ground: Cushman & Wakefield 2016 outlook
The office sector in Sydney and Melbourne — Australia’s largest markets — is poised for modest improvement in 2016, says the latest Cushman & Wakefield’s Asia Pacific Outlook for the year, after property markets ended 2015 in higher gear even with below-trend economic growth in the region.
Sydney’s CBD is benefitting from ongoing structural changes to the Australian economy, especially with the services sector in New South Wales witnessing a resurgence in employment as the state economy returns to trend growth rates, the research headed by Sigrid Zialcita notes.
Population growth, retail spending and dwelling construction activity have been the main contributors to the state’s economic growth in recent quarters.
Similarly, a revival in Melbourne’s CBD will persist as corporate expansions gain traction and the flight- to-quality sees businesses relocate from the suburbs. As the development cycle ebbs, prime office rents in Melbourne’s CBD are forecast to edge up moderately as vacancies continue to fall.
That said, expect office prices in both cities to appreciate and spur further compression in cap rates, especially for the highest-grade buildings, although investment volumes are expected to slide due to the lack of stock on the market.
Another factor driving up prices in both cities is the perpetuation of high yields. Notably, with interest rates forecast to stay at record lows, not to mention that the Reserve Bank of Australia has left the door open to further easing to guard against downside risks, projected yield spreads (320- 340 bps) will remain among the highest in the region.
However, Western Australia, which is disproportionately exposed to mining, will continue to lag behind. As such, the office sector in Perth will continue to be sluggish.
