Scarce supply of Sydney investment despite strong demand driving down metro yields: Colliers

In calendar year 2016, metro investment volumes as a proportion of total Sydney CBD and metro sales were 57 percent with $3.9 billion in transaction volumes recorded compared to the CBD’s $2.9 billion, according to Colliers International's latest Metro Office report.

"On a 10 year average, metro sales make up 37 percent of combined CBD and metro sales each year, and for 2017 year to date, metro sales volumes have already reached 43 per cent,” the report stated.

Scarcity of investment supply and strong demand drove down metro yields during 2016 Colliers says.

“We expect A Grade metro yields to compress further as offshore groups continue to seek metro office assets to deploy capital, as investment-grade stock within the CBD remains limited.

"Market fundamentals for vendors continue to strengthen, with the Sydney-wide trend of constrained supply placing upward pressure on net effective rents,” the report advised.

Suburban peripheral markets are especially impacted by residential encroachment, heightening tenant activity as displaced tenants source alternative accommodation according to Colliers.

“Furthermore, investment in infrastructure and amenity has contributed to an uplift in rent and competition for space, especially within core metro markets such as Parramatta and North Sydney.

"Average A Grade yields for Sydney Metro have tightened by 47bps over the past 12 months to average 6.79 percent in March 2017, and the secondary market has experienced a tightening of 56bps to average a current yield of 7.74 percent.

"Taking into consideration market fundamentals and rental outlook, the purchasers of secondary metro assets will most likely be opportunistic, seeking value add opportunities,” the report stated.

Further compression of metro/office property is likely, Colliers says.

“Furthermore, the spread of 5.01 percent over the risk free rate for secondary assets suggests further significant compression is likely," it advised.

Metro office assets is still appealing to investors Colliers states.

"While metro markets have enjoyed above-average yield compression over the last six months, metro office assets still present an appealing case to investors, Coliers suggested, as the yield premium to CBD assets is currently 120bps.

"The recent offering in North Sydney of 116 Miller Street and 173 Pacific Highway (opposite the future Victoria Cross metro station) and Dexus’ Phillip Street development in Parramatta (pre-committed by the Department of Education for a 12 year term) should see the yield spread between CBD and metro assets narrow,” the report advised.