Office sales in Sydney hit $6.46 billion in year to March '16: Savills

The Australian CBD office property markets are one of the most transparent in the world, according to Savills recent report on CBD Office Market Briefings Q1/2016.

The sector comprises approximately 17.5 million square metres of office floorspace across eight distinct CBD markets. As Australia is a federated parliamentary democracy, each capital city has its Parliament and law courts effectively anchoring the CBD with additional service industries, hospitality and education.

The Sydney CBD is currently Australia’s largest office market, with 5.07 million square metres of total stock.

Sydney CBD is considered a primary location for the head offices of most of Australia’s top listed companies. The CBD is favoured by many investors and tenants alike; a fact highlighted by some of the strongest prime property rents and yields across the nation. The market currently comprises 55 percent prime grade space (Premium & A Grade) and 45 percent secondary grade space (B, C & D Grades). The development of Barangaroo and 200 George Street, coupled with the withdrawal of secondary buildings for change of use(residential and hotel) conversion, should see this composition remain over the medium term.

Sydney saw record office sales year on year with $6.46 billion worth of transactions, 48% of which was purchased by funds. 

Savills recorded 283,446 square metres of CBD office leasing activity in the 12 months to March 2016.

Office Development

The Sydney CBD office market added 149,498 square metres of gross supply over the second half of 2015, the largest six monthly increase in over a decade. The supply was largely attributed to the completion of Barangaroo International Tower —T2 (88,200 square metres). Other notable projects to reach completion over the period included 5 Martin Place (31,280 square metres) and 20 Martin Place (15,290 square metres), with the balance reflecting refurbished / backfill space. Counterbalancing this supply was the withdrawal of office stock for alternative uses, redevelopment and refurbishment, which totalled 47,217 square metres over the second half of 2015. These included 60 Martin Place (27,855 square metres), that will be redeveloped to accommodate 38,600 square metres of office NLA. As a result, net supply over the second half of 2015 totalled approximately 100,000 square metres.

Around 300,000 square metres of new and refurbished stock is currently under construction, aiding supply through to the second half of 2017. Around 250,000 square metres will be newly developed stock. Notable projects include, International Tower T1 (101,000 square metres), T3 (78,000 square metres) and 200 George Street (38,000 square metres).

There are a number of buildings within the Sydney CBD that have been earmarked to be withdrawn from the market for conversion to residential or hotel use over the medium-term. The potential permanent future withdrawals over the next decade could equate to approximately 300,000 square metres and would shrink the current size of the Sydney CBD office market by 6 percent. The subsequent spill of tenants, which totals approximately 272,000 square metres, would place considerable downward pressure on the overall vacancy rate.

An uptick in withdrawals is expected in 2017, as the NSW Government compulsorily acquires 19 CBD assets, totalling 63,000 square metres, to make way for the Sydney Metro rail project. Tenant profiles (with in the five largest assets) affected by these acquisitions would include Government (27%), Business Services (35%), Law (14%), and Investment Services (11%). In December 2015, the NSW Government made its first acquisition for the metro line, purchasing 175 Castlereagh St for $98 million from Centuria. It is understood the sitting tenants will have until the end of 2017 to find alternative accommodation.

Supply of new stock is anticipated to return to a more normalised level beyond 2017, with limited developments within the current pipeline. Notable developments during this period include 151 Clarence Street (19,910 square metres), 60 Martin Place (40,000 square metres), 10 Carrington Street (58,000square metres) and 50 Bridge Street (90,000 square metres).

Sales Activity

Savills have recorded approximately $6.46 billion of Sydney CBD office transactions, in the 12 months to March 2016, in the Sydney CBD. This is up 44 percent from $4.5 billion in the previous 12 months, and up on the five year average of $3.5 billion. During the same period 34 properties were sold, down on the previous 12 months (43), however, up on the five year average of 32.

In January 2016, Invesco acquired 77 King Street for $160 million on a yield of 5.80%, from Keppel REIT. The property is located above the Sydney Apple store facing George Street and has a WALE of 3.74 years. In 2010, Keppel REIT paid $116 million for asset, realising a 38 percent capital gain on the sale.

Bolstering recent investment activity was the sale of the Investa Property Trust porfiolio of nine assests to China Investments Corporation (CIC). The portfolio generally comprised of Premium or A Grade office buildings. Six of the assets are located in the Sydney CBD. At a reported $2.455 billion ($1.825 billion in the Sydney CBD), the sale represents an approximate 25 percent increase on the understood December 2014 book values and a reported portfolio yield of 5%. This result arguably reset the benchmark for market yields and IRRs for good quality CBD assets by 25 to 50 basis points tighter over second half of 2015.

Investment demand by local 'Fund' purchasers overtook foreign investment for Sydney CBD stock, in the 12 months to March 2016, purchasing 48 percent of the stock sold ($3.08 billion). However, the 'Foreign Investor' category had the most transactions (16).

Domestic investors are expected to remain competitive for quality assets supported by sound fundamentals. Savills note the purchase of 420 George Street by Investa Property Group for $442.5 million in March 2016. With a reported initial yield of 5.30%, the transaction reflects one of the tightest yields for an A Grade asset purchased by a local post GFC. Market yields in the Sydney CBD, as at March 2016 are estimated to range between 5.25% and 6.50% for A Grade buildings, and between 6.00% and 7.75% for secondary grade buildings. The average yield for A Grade office buildings in the quarter to March 2016 is 5.88%, a 63 basis point firming over the last 12 months. Average B grade yields also tightened over the same period by 63 basis points. The compression in the prime and secondary ranges reflects substantial firming of yields across the CBD market.

Capital values in the Sydney CBD, as at March 2016 are estimated to range from $8,923 to $17,429 per square metre for A Grade buildings, and between $5,387 and $10,292 per square metre for secondary grade buildings. Average capital values for A Grade properties are $12,723 per square metre, a 14.1 percent increase over the last 12 months, with this driven by the aforementioned yield compression and some signs of rental growth.