Sydney leads as global yields remains firm: Savills

Sydney leads as global yields remains firm: Savills
Sydney leads as global yields remains firm: Savills

Sydney leads top global cities in office yields, which continue to firm as investors seek safe havens for their funds amidst economic and political uncertainties which look to prevail for some time, according to real estate firm Savills.

The latest World Office Yield Spectrum report by Savills and Australia’s Deakin University found yields across 11 gateway cities had firmed by an average 95 basis points since December 2014, with San Francisco witnessing a dramatic 32 per cent fall from nearly 7 percent to 4.64 percent.

Of the gateway cities, Sydney led the pack offering by far the most attractive yields at 5.37 percent, with LA West and San Francisco the only others offering above 4.50 percent.

Shanghai and LA West recorded falls of just 0.29 and 0.31 percent respectively.

The data from 54 cities across Asia, Europe, the US and Australia, put Hanoi on top with a prime yield of 8.75 percent followed by Ho Chi Minh City at 8.5 percent.

Taipei brought up the rear with the tightest yield of just under 2 percent, while Hong Kong was at 2.5 percent.

Report editor Tony Crabb, Savills national head of Research in Australia, said overall office markets looked set for another year of strong investment.

It will be driven by office property’s most preferred investment status along with economic and political factors which had pushed investors towards the safety of bricks and mortar.

"This is an interesting time in the investment cycle where markets have responded to the inflation/growth trade by pushing bond yields and growth stocks, whilst also recognising office markets should perform well as demand grows’’ Crabb said.

He said with some level of economic and political uncertainty remaining in most markets it was fair to say that office risk premiums would continue to offer very good value and hence drive demand and, in some instances, even firmer office investment yields.

"Much of what happens in 2017 and beyond will depend on the course the US Federal Reserve takes with regards to interest rates and the new President’s policy settings.

Those factors, along with Brexit negotiations and elections in key European countries, will largely determine how currencies behave, how trade flows and how capital moves around the world,’’ Crabb said.

He said if anything would limit office property investment it was the shortage of stock in most gateway markets which had experienced, in some instances, record investment levels in recent years.

"That shortage of stock is being exacerbated by the strength of leasing markets, especially in gateway cities, which is driving tighter vacancy and rental growth, and landlords are happily holding on for the ride,’’ Crabb said.

 World Office Yields: Gateway Cities – 2014 - 2016


December 2016 %

December 2014 %

Change %




- 1.25

LA West



- 0.31

San Francisco



- 2.33




- 0.29

New York



- 0.95




- 1.32




- 0.50




- 0.85




- 0.75




- 1.34

Hong Kong



- 0.58

Source: Savills Research

Australia/New Zealand

The $27 billion worth of commercial property transactions recorded in Australia in 2016 remained above the five-year average for the fourth year running, Crabb said.

Meanwhile, the market was on track to record a fifth consecutive year of growth, a lack of portfolios and a diminishing supply of prime properties would limit investment volumes.

Foreign investors were the most active in 2016, purchasing 40 percent of stock reported sold - approximately $10.7 billion - while professional investors.

It is represented by trusts, funds and syndicates, spent $8.75 billion.

Crabb said while both buyer groups remained keenly interested in ongoing investment, yields would continue to firm.

"In some markets, particularly Sydney and Melbourne, market fundamentals are improving rapidly. "We believe this improvement will lead to further tightening in yields as investment capital starts to price in expectations of future NOI growth. This part of the yield cycle is just beginning,’’ he said.

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Sydney leads as global yields remains firm: Savills


In Hong Kong, Savills’ senior director, Research and Consultancy, Simon Smith, said yields across Asian investment markets had firmed but there was still some limited scope for further falls.

"The low interest rate environment, the ongoing search for yield and increasing allocations to real estate are all considered to be positives for the sector.

One of the most significant challenges for investors is a lack of prime office stock and volumes have fallen consistently compared with 2015.

This is a situation which is unlikely to reverse any time soon,’’ Smith said.

He said the lack of liquidity across most asset classes had arguably been masked by the above average number of portfolio deals recorded over the second half.

"Scarcity of assets has resulted in money accumulating on the side-lines causing fundraising to decline versus the previous year,’’ Smith said.

He said despite its inward focus Asian real estate capital had continued to explore overseas markets with the US attracting the lion’s share of deals.

Cross border activity had been dominated by China, South Korea, Singapore and Hong Kong in that order while South Korean activity registered the highest rate of increase.


Savills director, Research Europe, Lydia Brissy, said Brexit had seen a decline in institutional investment activity but a sharp rise in demand from off-shore private investors.

Many investors, she said, had been attracted by the weakening of the pound which was seen as enough to compensate for a perceived increase in occupational risk.

"Overall, our predictions for 2017 and beyond are investment volumes are expected to trend downwards towards £50 billion per annum, with a swing away from opportunistic deals to income-security plays.

Yields are expected to rise in most sectors, though the stable debt market, low vacancy rates, and global investor demand is expected to put a lower ceiling on prime yields than was reached during the GFC.

Brexit definitely carries a risk of creating a sustained period of occupier uncertainty, but to some degree this should be balanced by lower levels of development activity.

However, until some clarity emerges as to how Britain will exit from the EU, the real impact on the UK market will be hard to quantify,’’ Brissy said.

She said the expectation was that investment volumes in Continental Europe in 2017 would be similar to 2016.

"Although interest rates are expected to rise to 1.16% in the Eurozone, the property market should remain high on investors’ radar.

In France, Germany and the Netherlands where elections will be held, we expect a wait and see attitude, however the prevailing story regarding core countries is the lack of prime product."

She said prime yields in non-core countries remained above the European average, offering more attractive returns and yield compression potential.

"This is especially so in countries like Spain and Italy where strong property fundamentals combined with the availability of portfolio opportunities are attracting foreign investors.’’


In New York, director of US Real Estate Analytics at Savills-Studley, Keith DeCoster, said in comparison to the volatility in equity markets, real estate in the United States held up very well in 2016 with office property sales totalling $124 billion to November, roughly 4 percent below the $129.6 billion in the first 11 months of 2015.

"The 'most-favoured market' status of some gateways is slipping slightly with most buyers showing disdain for markets such as Manhattan and Washington DC, where demand is running short of growing supply," DeCoster said.

"On the other hand, they have remained active in Boston and Los Angeles, where the life science and entertainment/social media sectors continue to grow."

He said Boston’s market fundamentals were among the strongest in the country and appeared as though they had more to run than San Francisco.

It had seen a recent spike in sublet supply and drop off in leasing, while Los Angeles has seen its strongest leasing volume in a decade.

Sydney Savills

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