Sydney CBD office yields at pre-GFC lows

Close to four years of yield compression has pushed Sydney’s CBRE office yields to a historical, pre-GFC low.

There's potential to fall further, new research from CBRE suggests.

A new report from the group highlighted that Sydney CBD core prime office yields reached a nine-year low of 5.2% in Q3, while secondary yields are 20 basis points off their pre-GFC low of 5.9%.

CBRE’s Michael Pisano said while the office sector was reflecting similarities with the market pre-GFC, there were key differences that suggest the current growth cycle could be maintained for longer.

“Capping off an impressive run in yield compression over the past three and a half years, Sydney CBD office yields have reached pre-GFC lows - without the same level of market rental growth to stimulate pricing when compared to the market in 2007,” Pisano said.

“Evidencing this, the drivers of the current market are vastly different when compared to the previous cycle, which further suggests a greater degree of sustainability.”

CBRE head of research Stephen McNabb said the Reserve Bank’s approach to monetary policy had created an environment that was conducive to a healthy commercial property market.

“A long period of lower interest rates has been the key stimulus to the current cycle, however the next phase will be supported by lower vacancy rates and forecast rental growth,” McNabb said.

“The other difference between now and the pre-GFC peak is that the fundamental outlook for the Sydney office market is looking solid. Vacancy - currently 5.6% - is expected to fall to 3.3% by 2018 and prime effective rent growth is running at a 23% annual rate in Q3 2016.

“Importantly this rent growth is following, not leading, the yield compression which is in stark contrast to the performance of the office market after the GFC.”