This article is from the Australian Property Journal archive
THE Sydney CBD office market is in the early stages of a recovery, however an economic crisis in China could slow the revival until 2016, according to DTZ.
DTZ’s head of SEA Dominic Brown said there has been a widely held view that following a sustained period of weakness from 2011 to 2013, office tenant demand in Sydney would begin to recover in 2014 and strengthen in 2015.
Brown said the latest PCA figures suggest that the nascent is on track, however closer examination shows the sector is more sensitive to changes in global and local conditions.
“The baseline expectation is for a continuation of the slow, but steady global recovery. However, downside risks persist, with the most relevant to Australia being financial crisis in China resulting from unsustainable credit growth in the property sector,” he added.
There are fears that China may be heading for a Japanese-style economic crisis. Recently a Bank of America Merrill Lynch report by Naoki Kamiyama and David Cui noted the China’s economy has followed Japan’s script, page by page.
“China’s development unfortunately has largely followed the script written by Japan some 30 years ago.
“China today is facing many similar problems Japan did in the late 1980s and early 1990s — imbalanced growth, government stimulus, overcapacity, an overwrought housing market, and a severely under-capitalized financial system,” they said.
Brown said DTZ’s analysis of the most severe scenario, which is the China crisis, reveals there is little potential for outperformance for Sydney CBD with total net absorption of less than 10% above baseline.
“The flow on from this demand profile is that vacancy is expected to remain range-bound between approximately 8.0% and 11.3% under all scenarios. The implication being that the market is expected to maintain a broad equilibrium between tenant and landlord, with a slight bias towards favouring tenants,” he said.
Meanwhile DTZ analysis shows the vacancy rate could rise sharply in the event of a China crisis. Brown said Sydney is currently experiencing considerable churn in the composition of its office stock through large-scale additions and withdrawals.
Sydney will add more 700,000 sqm between 2015 and 2018 – well above the long-term annual average of 140,000 sqm. Over the next four years, 400,000 sqm of projects currently under construction are expected to be completed including International Towers Sydney and projects on George Street.
A further 300,000 sqm, will be brought back to the market, much of which is refurbished space in the Martin Place precinct.
At the same time, stock withdrawal is expected to continue, divided between temporary and permanent withdrawals. Temporary stock withdrawal up to 245,000 sqm is expected to occur as backfill space, however the majority of this stock is expected to return to the market before the end of 2018 and comprises 82% of the refurbished supply.
Brown said without the permanent stock withdrawals, vacancy would peak at 11.3% in 2018 under the baseline, increasing to 12.7% under main downside scenario.
“As a result, net face rental growth has been somewhat anaemic over recent years and this is expected to endure over the near term. The injection of new supply in late 2015 and early 2016 will suppress rental growth, however some of the downward effects of increased supply will be offset by increased demand.
“As the supply cycle draws to an end in 2017-18, stronger tenant demand is forecast to result in more pronounced rental growth of up to 4% under the baseline and between 2%–5% across all scenarios,” he continued.
Despite the worst case scenarios, Brown said the consensus view is that the Sydney CBD office recovery will be slow and steady.
“There needs to be a significant downside event for the recovery to be substantially derailed. Consequently we see opportunities for tenants in the near term, before the market becomes more neutral from late 2016 onwards,” Brown concluded.
Australian Property Journal
