Sydney CBD strata office volumes for the first half of 2019 continued to be robust, with $101.77M recorded in sales, according to Ray White’s latest Between the Lines* research.
Ray White Commercial NSW Associate Director Samuel Hadgelias said overall fundamentals of the Sydney CBD office market remained strong, but the overarching demand levels for purchasing strata stock were starting to show signs of wavering.
“Lack of quality strata office offerings saw much competition emerge for stock in 2018, but the continued limited availability on the market this year has kept prices growing, albeit with less urgency from buyers,” Mr Hadgelias said.
“Reductions in interest rates should further stimulate this market but the continued difficulty in obtaining finance has slowed the pace of buyers acting.
“While this hasn’t affected the overall increase in capital values, which has grown 14.02 per cent compared to 2018 annual results to average $13,900psqm (on an adjusted basis), it highlights a shift in sentiment across the market.
“The Sydney CBD Strata market continued with the same momentum of late 2018, resulting in a significant volume of sales during the first half of the year.
“Looking ahead, there’s a lack of quality stock available to the market, which is likely to result in a reduced sales turnover level during the late part of the year.
“With low interest rates and reducing yields across most investment options, many owners are now looking to hold their assets, particularly during this time where vacancies are low and face rental levels have been elevated.
“Capital values across most precincts recorded for 2019 continue the upward trajectory that have been witnessed since the 2014-15 period.
“Over the past 12 months, the most significant increase has come from the Midtown precinct, growing 17.71 per cent on 2018 results to $13,852psqm, this however can be attributed to the larger number of smaller sales which often attract a premium.”
Ray White Commercial NSW – Sydney Office Leasing Principal Anthony Harris said Sydney CBD had enjoyed robust rental growth over the past four years during low vacancy and much disruption to the city centre.
“Over this time where stock has come and gone from the CBD, total stock levels have remained steady, which has been the catalyst for the significant occupancy improvement and rent escalation,” Mr Harris said.
“Incentives have also eroded during this period, but kept stable over the past 12 months to represent 10-12 per cent on average, albeit the range substantially based on both the quality of the premises and other agreed lease terms.
“Over the last year prime net face rents recorded only a small 3.85 per cent increase, to average $1,080psqm yet within a range of $950psqm to $1,240psqm, well below double digit growth recorded for the prior couple of years.
“Sydney continues to be the number one office market in Australia that both domestic and international funds are seeking to invest in.
“The spotlight on the Sydney CBD is due to its global city status that has continued to put downward pressure on already record low yields.
“While the fundamentals of the office market continue to be sound with low vacancy, we’re seeing strong increases in face rents while the local economy continues to grow, due to increased population and job numbers.”
Ray White Head of Research Vanessa Rader said the vacancy situation for the Sydney CBD market was one envied by many other markets.
“Prime vacancies continue to consolidate their already low position while secondary markets have shown signs of vulnerability as tenants opt for more affordable accommodation options,” Ms Rader said.
“Premium grade assets continue their swift downward movement currently recording vacancy at 2.7 per cent, down 110 basis points over the last six months, while A grade witnessed a 40-point reduction to 3.2 per cent.
“B grade has similarly fallen to 4.1 per cent but C grade assets, despite its substantial stock reduction to just 450,745sq m (the smallest ever recorded), saw vacancy levels grow to a two-year high of 6.2 per cent.
“Over the past couple of years, Sydney CBD has benefitted from the fluctuations in stock levels more so than underlying employment demand, growing the need for additional office space.
“Absorption for the first half of this year has decreased, losing 3,623sq m of tenancies out of the market.
“Affordability continues to be a key issue for tenants in Sydney CBD with smaller operators taking advantage of the flexibility of co-working spaces and putting off committing to traditional commercial office leases.”
*Ray White Between the Lines Commercial Research – Sydney CBD Office (Including Strata) Overview – September 2019.