Sydney office rents rose sharply in 2016, trend to continue: Savills
Net effective rents in the Sydney CBD office market rose significantly in 2016 across both prime and secondary buildings and the trend is expected to continue in 2017, according to Savills.
The property firm’s Sydney CBD Office Briefing Report highlights an improved leasing environment with strong tenant demand, stock withdrawals and falling incentives resulting in significant net effective rental growth.
Net effective rents in the Sydney CBD enjoyed year-on-year growth in 2016 of +60% for B Grade office space, +48% for A Grade and +26% for Premium. Helping this growth were sharp drops in incentives in 2016 of -34% in dollar terms for A Grade, -26% for Premium and -25% for B Grade. Net face rents rose +28% for B Grade, +14% for A Grade and +6% for Premium.
Savills Australia national head of Research & Consultancy Tony Crabb said both prime and secondary rents are rising in Sydney on the back of a shrinking pool of secondary stock.
“The scarcity of secondary space has driven up both face and effective secondary rents and has caused a similar effect, albeit more muted, in the prime market as tenants are forced to upgrade,” he said.
“Net effective rental growth was most pronounced due to the effect of declining rental incentives as highlighted by the 60% jump in B Grade net effective rents year-on-year. There was also a substantial increase in A Grade net effective rentals (up 48%) and Premium net effective rentals (up 26%).
“Looking forward, we anticipate that net effective rents will continue to increase, particularly for secondary and A Grade accommodation. This will be a function of continued demand from displaced tenants, the ongoing shortage of secondary stock and the ongoing effect of declining incentives.”
Rob Dickins, Savills Australia national head of Office Leasing, said Sydney tenants will have a modest choice of options for prime accommodation in 2017 as some backfill space becomes available.
“We estimate approximately 102,400 sq m will be released this year, however about two-thirds of this space is pre-committed. The majority of the 21,750 sq m of new supply entering the market is also pre-committed, such as the 15,000 sq m Darling Harbour Live building which CBA will occupy. These new options will be welcome news for tenants given the likelihood of further upheaval in the secondary market in 2017,” he said
“Secondary stock withdrawals during 2016 totalled some 39,000 sq m for residential or hotel redevelopment purposes. This has effectively forced many displaced tenants to actively compete on B Grade space or upgrade their space requirements to either A Grade or Premium, as several have done. This has created upward pressure not only on secondary rents, but also in prime rents to a lesser extent.”
“We expect this trend to continue in 2017 as further tenants are displaced owning to the withdrawal of a further 62,900sq m of mostly B Grade space for the Sydney Metro project.”
Simon Fenn, Savills NSW managing director, said the rental growth in the Sydney CBD office market is welcome news for owners and investors.
“Sydney A Grade and B Grade markets offer investors the opportunity of increased rental returns as we anticipate continued reduction in market incentives over the short to medium term,” he said.
“A Grade yields tightened 75 basis points during 2016 while B Grade yields tightened significantly by 113 basis points in the course of the year. Recent rental growth and the prospect of further growth bodes well for investment yields given the implications for total returns.”
“Investment appetite from both local and international investors for core Australian office assets remains high and continues to benefit from the spread between property income yields and long-term government bond yields. This investment environment is expected to support continued investment demand for quality Australian commercial property assets.”
Fenn said local buyers were dominant in the Sydney CBD office market during 2016, accounting for 70% of the capital transacted. Developers made up the largest portion (25%) followed by Trusts (22%) and Funds (15%) which is consistent with the high levels of development activity currently underway in the Sydney CBD. Chinese investors claimed half of the capital invested by foreigners, with US, German and Hong Kong buyers making up the remainder.