This article is from the Australian Property Journal archive
SYDNEY CBD occupiers are continuing to seek office space upgrades, while the resulting improvements in rents are forecast to create a flow-in effect for well-managed assets once capital returns to the market.
According to M3 Property’s new NSW Office Market Insight report, prime gross face rents increased by circa 10.91% in the 12 months to September to range between $1,150 and $1,900 per sqm.
Secondary gross face rents increased by circa 9.68% over the year, and now range between $870 and $1,300 per sqm.
“Office occupiers in the Sydney CBD are increasingly seeking quality space as more workers return to the city, with activity also being driven by displaced tenants due to metro redevelopment,” said M3 Property managing director, NSW Andrew Duguid.
“The CBD leasing sector is quite active, with relatively high incentives creating the motivation for businesses to move into better-quality office space. Occupancy is increasing year-on-year, and rents are growing. There is positive momentum in select parts of the market,” said Duguid.
Face rents’ gradual improvements throughout 2023 has been supported by high incentives, and once capital comes back onto the market, it is expected to flow to those assets that are being well-managed now.
Prime incentives increased by circa 1.5% in the 12 months to September, ranging between 32% and 38.5%. Secondary incentives increased by circa 2.5%, ranging between 30% and 38%.
New subleases being offered and several multi-national organisations consolidating their occupational footprint meant negative net absorption of 25,100 sqm in Sydney the September quarter, JLL data shows. Over the past 12 months, the core precinct recorded 61,000 sqm of positive net absorption, while other precincts experienced a reduction in occupied stock.
The Sydney CBD sublease market appears to be stabilising, according to CBRE, as the rapid introduction of new stock seen over recent quarters slows.
Capital markets transactions reflect a change in value metrics
Despite the improvement in the leasing space, the current market conditions have resulted in a thin volume of transactions in the Sydney CBD in the year to date.
“Those transactions that have been recorded have reflected material changes in value metrics from 2022,” Duguid said. Dexus, after an extensive due diligence phase, concluded the sales of 44 Market Street and 1 Margaret Street at $393 million and $293 million, respectively at well below book value.
Duguid said there is an increasing spread in value metrics between prime and secondary, with the spread returning to historic norms.
“The market is returning to a position where there is an appropriate yield spread between asset quality, and risk is now being fully priced in. Investors may return in larger numbers in 2024 as valuations adjust to market circumstances.”
Prime CBD yields ranged between 4.30% and 5.00% during the September quarter, softening 40 basis points compared to the September 2022 quarter.
Yields for secondary CBD office assets ranged between 5.10% and 6.40% during the September 2023 quarter, softening by 70 to 110 basis points compared to the September 2022 quarter.
“Over the past 12 months, there has been limited capital available for office assets and this may continue until such time as there’s a conviction that values have stabilised, which may be in 2024. Investors are expected to return in larger numbers in 2024 as valuations adjust to market circumstances,” Duguid said.
“This may mean there is further yield decompression to come. The extent of this will be determined by interest rate and broader cost of capital trends.”
Transaction activity in the Sydney CBD market has slowed considerably with an estimated $1.08 billion of properties transacting in the year to date for 2023 – compared to $4.21 billion for the whole of 2022. Increased caution entered the market during the second half of 2022, and this dampened investor demand.
