View of Circular Quay with the Cahill Expressway from a Sydney ferry. The office leasing market in the CBD is delivering good results, particularly for landlords. Photo: Janie BarrettInvestors from all parts of the globe pumped more than $35 billion into the country’s office markets and the coming year is tipped to be just as busy.
Buyers ranged from Asian sovereign funds, private super funds and Australian real estate investment trusts. The one big entrant was the Canadians, which bought up $25 billion worth of Australian assets from ports to office blocks.
According to agents, REIT managers and super funds, the low Australian dollar, higher yielding bricks and mortar and a volatile share market, will again attract the investment cash to property.
Takeover activity among the REITs, such as the proposed deal between DEXUS Property and Investa Office, will also trigger some asset sales.
Colliers International managing director John Marasco said of the $35 billion in sales, half were domestic purchasers.
He said Australian investors are now increasingly moving offshore, spending about $5 billion overseas in 2015, which is more than double the 2014 level but significantly lower than the almost $28 billion in 2007.
“Next year, we expect that this growth in investment will continue however there will be different types of investors in the market compared to the previous cycle,” Mr Marasco said.
“In 2007, the most dominant purchasers were Australian institutions. In the current cycle, these institutions are increasingly being funded by offshore groups who are looking to partner with them because of their expertise in Australian property.”
He said the dominant groups going offshore will continue to be Australian superannuation funds as they seek to diversify their investment into direct property. Finding the scale necessary in Australia is increasingly difficult and offshore markets provide a significant pool in which to invest.
But while sales were hectic, the underlying office leasing market continued to deliver good results, particularly for landlords.
John Preece, national director, office agency at Knight Frank said 2015 has been extremely positive for the Sydney CBD office market.
This was driven by improving occupier demand and limited supply resulting in a reduction in vacancy to 6.3 per cent. There has also been a convergence of the prime and secondary vacancy rates following a period of outperformance in secondary assets.
“Vacancy rates of less than 8 per cent are typically conducive to effective rental growth, indicating positive times for owners,” Mr Preece said.
“However, for context, the prime grade reduction in vacancy has largely been driven by aggressive incentives of around 30 per cent, whilst secondary incentives have fallen to 20 to 25 per cent in many instances.
“Looking ahead to 2016, I expect vacancy to rise over the next 12 to 18 months, peaking in early 2017. Our original projections were that the peak vacancy in prime grade assets could reach 10 per cent to 11 per cent, as significant supply is not totally offset by demand and stock withdrawals.”
But the impact of the Sydney Metro compulsory acquisitions will clearly reduce this.
In the CBD, about 150 occupiers across 61,000 square metres of office space will be displaced in the next 18 to 24 months, representing 1.2 per cent of the entire office market.
“This, of course, is an opportunity. With a continued rise in business confidence, I believe that many of the displaced occupiers will take the opportunity to seek better quality accommodation for their next lease cycle,” Mr Preece said.
“For many, this will mean a jump from secondary grade to prime grade premises, and let’s be honest; this is where the demand is needed with the upcoming wave of prime grade supply. As such, I believe that the peak in prime grade vacancy in early 2017 may be reduced to around 9 per cent to 9.5 per cent.”
As was the case in 2015, the technology sector was one of the busiest tenants across all central business districts. Aside from the Google mandate of about 60,000sqm of space, which is likely to go to White Bay in Sydney’s Bays Precinct, a lot of other groups are in the market looking for CBD digs.
The head of office leasing for NSW at JLL, Daniel Kernaghan, said the leasing recovery in the Sydney CBD has been gathering momentum over the course of 2015.
He said the entry and expansion of tech firms, as well as growth in finance and education institutions has driven strong net absorption, which is currently 120,300sqm for the first three quarters of 2015. “Another trend which emerged this year was tech companies taking up space traditionally leased by law firms and investment banks. We have seen this in particular in office assets at Martin Place,” Mr Kernaghan said.
“This strong take up has resulted in a significant tightening in vacancy, particularly in the A Grade market – 3.8 percentage points over the 12 months to September 2015. This fall in prime vacancy will result in a fall in incentives which have been historically high over the past two years.”
He said this fall will largely be a result of increased competition for a few quality contiguous space options in the Prime Grade space in the Sydney CBD.
“We expect prime incentives to trend downward over short to medium term, which will be a catalyst for strong prime gross effective rental growth during that same period of time,” Mr Kernaghan said.
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