Contributors: Cassandra Mortimer | Director (Sydney); Amy Ho | Associate Director (Hong Kong); Guy Grantham | Director (London); Alex Taylor | Surveyor (London).
The Sydney CBD office market has long been regarded as an investment market of choice for institutions from around the globe, particularly from the likes of Japan, Germany, the United Kingdom and Singapore. In more recent times we have also seen investment into the Sydney CBD office market surge from both institutions and private investors from Hong Kong, China and Canada.
The Sydney CBD office market is viewed as having strong fundamentals due to sound leasing structures, fixed rental reviews and a high level of market transparency supported by stable Government policies. Overlay these factors with strong population forecasts and it is evident that the Sydney CBD office market will continue to register interest from Global investors many of whom are now also being represented by local fund managers.
Sydney ranks 10th in y-o-y forecast population growth between 2015 to 2030 (Melbourne 2nd, Brisbane 9th) *
Sydney ranks 3rd in y-o-y forecast population growth between 2025 to 2030 (Melbourne 1st, Brisbane 2nd) *
How do we compare to other global office markets?
Sydney CBD office market conditions are currently trending at all-time highs with regard to rental and capital values. Whilst investment trends vary from market to market, Sydney CBD office yields are contracting to historically tight levels therefore many market participants are now looking at global markets to gain a sense of comparison. Colliers International Global Research and Valuation & Advisory Services network has produced the following office market comparison of statistics and Prime investment metrics from the Sydney CBD, Hong Kong (Central/Admiralty), Singapore (CBD) and London:
* AUD conversion current as at August 2019
** Data current as at Q3 20
As can be seen in Table 1 above, the Sydney CBD office market, as at Q3 2019, is still priced below Hong Kong, Singapore and London from a comparative rental perspective, with evidence that Hong Kong is the global stand-out commanding the highest Prime Grade rental values.
Whilst Sydney CBD office rents appear at the lower end of these key global markets, the leasing structures from an investment perspective appear more attractive. Compared to global counterparts, Sydney CBD office leases are typically structured over a longer term and have the added benefit of annual fixed rental increases, offering investors certainty of growth.
On the investment metrics front, Sydney CBD office capitalisation rates and capital values have compressed over the last few years and the gap or head room to other global markets is compressing. The notion of incentives in the Sydney CBD market (i.e. typically higher than our Asian market counterparts) has also been part of the Capitalisation Rate /Yield conversation, as our market has typically been running higher incentives which have been propping up face rentals. As the Sydney CBD market has now transitioned to a lower incentive environment (and forecast to continue to reduce in the short term prior to the release of the next supply cycle) this further adds weight to the argument that there is a convergence of comparative yield metrics between the Sydney CBD office market and other global CBD office markets. However, as shown above in Table 1 the Prime mature markets of Hong Kong and Singapore still continue to lead the way in the Asia Pacific region, whilst London is still considered a true global city and attractive to a multitude of capital sources despite the recent uncertainty created by Brexit.
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