Metro Markets benefit from a ‘perfect storm’ of conditions

Residential conversion, infrastructure spend & ballooning CBD asset prices all contribute to buoyant metro markets.

Sydney metro markets are embracing a long awaited evolution, underpinned by a historically high infrastructure spend and a state economy that remains the envy of the nation. The State Government’s plan to spend over $68.6 billion on infrastructure has increased the attraction of Sydney’s metro markets, with significant stock withdrawal for residential conversion and compulsory acquisition for infrastructure projects, pushing vacancy rates down. 

The downward motion in vacancy rates has been driven by a lacklustre supply and a significant withdrawal of stock. In recent years, the demand for residential developments has led to withdrawal of underperforming assets for conversation. The forthcoming Sydney Metro rail network project will amplify these effects as it triggers a new flurry of activity, with secondary assets being withdrawn for proposed new stations. Over 33 buildings in metro markets will be compulsory acquired for the Metro Rail project. 

“North Sydney is on the forefront of this transition, with significant investment activity underscored by the implicit uplift in infrastructure and leasing conditions,” said Dan Walker, Director in Charge of North Sydney for Colliers International.  “In the last year, over 48,000sqm was withdrawn from the market. Much of this was for the residential conversation, with over 1,700 units and 57,000 square meters of residential floorspace in the current pipeline.”

According to The Modern Australian Metro Market: contemporary ingredients for success, the latest Metro Office research from Colliers International, an additional five buildings amounting to 19,223sqm will be withdrawn for the proposed Victoria Cross Metro line station. The will impose further pressure on a historically tight secondary market, with the secondary grade vacancy currently at its lowest level since the peak of the economic downturn. The B Grade market in particular is expected to experience the greatest tightening as displaced tenants scramble to secure deals. This demand is exemplified by the fall in incentives given to smaller sized leases, with incentives dropping from 30% to 25-27%.

“The North Sydney secondary market now has the tailwinds for effective rental growth,” said Louise Rowe, Director of Office Leasing at Colliers International. “The amount of space leased in the second half of 2015 was 74% higher than the first half of the year and 28% higher the corresponding period in 2014.”

Similarly, development activity is now gathering pace in North Sydney. 177 Pacific Highway will be the first new development to the market in six years and is scheduled for completion in the third quarter of 2016.  The building is almost full leased. 

Building on this momentum, Dexus Property Group (DEXUS) and DEXUS Wholesale Property Fund (DWPF) has activated the 41,163sqm premium development at 100 Mount St after acquiring it in February. Ascendas has also purchased the Innovation Centre on Arthur St for $315 million at a yield of 6.2%.       

Investment activity continues to grow, with over $301 million of sales occurring during the second half of 2015. Although this 26% below the corresponding period in the previous year, the average transaction value was at a 23% premium. North Sydney remains a beneficiary of foreign interest, with 70% of this sales volume originating from China.

“The significant infrastructure development has increased the appeal of these metro markets for investors,” said Ben Masters, Manager of Valuation and Advisory Services at Colliers International. “Public transportation fears, that once concerned those investing in metro markets, are finally being addressed. Access to a larger working population will be achieved directly through the increasing residential development in these precincts, and indirectly through the shorter travel times thanks to the new infrastructure projects. Given the comparatively higher yields on offer combined with a lower price point, metro assets will continue to lure investors.”

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