Valuation considerations in the Sydney CBD market

The Australian investment market remains appealing on a global scale due to the attractive returns and overall transparency of the market when compared to our global peers such as London, Hong Kong and Singapore.

The Australian investment market remains appealing on a global scale due to the attractive returns and overall transparency of the market when compared to our global peers such as London, Hong Kong and Singapore. 

We demonstrated in our previous article how the Sydney CBD office market remains more affordable than its global peers from both a rental and capital value perspective and also how it provides longer term security to investors as a result of the underlying lease structures that influence asset cash flows. The relative stability of our market from both an economic and political standpoint is also attracting higher levels of attention and investment. 

Sydney CBD office assets continue to remain a highly sought-after commodity, with demand outstripping supply. The flurry of off market transactions that have been announced over Q3 2019, such as Blackstone’s acquisition of the Scentre portfolio and Charter Halls acquisition of 201 Elizabeth Street, are evidence of this. The strong demand for assets has seen investment yields steadily compress over recent years and combined with strong effective rental growth that has occurred more recently, capital values are now sitting at all-time highs.  

Average Sydney CBD Investment Yields

Average Sydney CBD Investment Yields

Source: Colliers Edge 

Average Sydney CBD Net Effective Rentals

Average Sydney CBD Net Effective Rentals

Source: Colliers Edge 


Average Sydney CBD Capital Values

Average Sydney CBD Capital Values

Source: Colliers Edge 

How does this affect the approach to valuing office assets in the Sydney CBD?

The applied investment metrics and market rents adopted for each valuation by their very nature are material assumptions that impact asset value. They are clear and observable inputs that are widely reported and openly discussed by all parties active in the property market. What is less obvious are those considerations and/or inputs that valuers adopt for each valuation that have an equally material impact on value, but that all parties may not be aware of. Some of the considerations that are generating more intense debate and discussion in the current market, include: 

  • Lease covenant strength and quality – closer scrutiny is being given to the underlying lease profile of an asset, particularly tenant covenants, to more accurately understand the cashflow risk. This has a direct influence on the applied investment metrics including adopted capitalisation rates, terminal yield spreads, and discount rates, which in turn have a material impact on value;
  • Capital expenditure requirements – a modern asset will require much less in the way of ongoing capital expenditure compared to a more established or second generation asset with the cost readily quantifiable as part of a good asset management strategy. But what additional works are required to ‘future proof’ an older asset, to keep up with current and future tenant demand and ensure obsolescence is avoided? Previous articles in this series have shed light on topics such as the importance of the customer and tenant experience, developments in technology, and building design considerations. This goes much further than just identifying the upfront cost of a project. The longer term impact on downtime and tenancy churn costs also needs to be considered as part of the valuation process; and 
  • Building compliance and ‘non-conforming’ materials are currently the subject of media attention due to the potential health and safety impact – significant and immediate capital expenditure can be required to address rectification orders in the event of any non-compliance. Furthermore, increased downtime can result should tenants vacate due to an increased fire threat. Increased insurance costs and/or the need to implement additional fire protection measures may inflate outgoings and decrease capital values until rectification. 
It is imperative that expert advice and guidance be obtained by owners and made available to valuers, so that the potential impacts on value can again be quantified.

Together with assessment of the ‘obvious’ elements of value these additional factors are increasingly influencing value in today’s market. In order to protect and maximise asset value, it is more important than ever to have a strong network of property professionals who understand what drives and impacts value.

For more information on how Valuation & Advisory Services can maximise the potential of your property, please contact one of our experts today.

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Cassandra Mortimer

Director | Office

Sydney CBD

Provision of valuation and consultancy advice for Institutional grade commercial assets within the Sydney CBD for internal / statutory reporting and registered first mortgage purposes.

Key clients include Mirvac, Super Investment Management (REST), Brookfield, Charter Hall, DEXUS, Lend Lease and ISPT.

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