Sydney prime offices to yield 20% returns for investors: CBRE
Market forces are aligning for investors in prime office property in Sydney CBD, with CB Richard Ellis forecasting total returns of 20% by 2012, according to CBRE global research chief Kevin Stanley.
More than half of this total return will come from rent increases of 10 to 12% in 2012 as the office market recovery finally gathers pace.
Stanley told Property Observer the two other factors contributing to totals returns (income and capital appreciation) of 20% will be a drop in incentives – forecast to reduce from 29% to 22% through 2012 – and a “slight compression in the capitalisation rate”, which will push up building valuations.
Incentives currently offered to tenants include rent-free months and free office refits.
Speaking to more than 350 people at CBRE’s annual Sydney Market Outlook breakfast, Stanley said he expected the prime office vacancy rate to be as low as 6% by the end of the year.
“While there is some scope for a slight compression in investment yields, income growth will be the key value driver in this recovery,” Stanley says.
“It has taken longer than we may have initially expected, but prime rents are increasing and incentives are starting to move down, and this combined will provided a super boost to returns over the next 12 to 18 months.”
The Sydney prime market is also likely to be boosted by an Asia-Pacific market performing poorly relative to stronger markets like Hong Kong and Singapore.
Stanley says this will encourage offshore investment in Australia given the positive market fundamentals and the likely opportunities for future capital value growth.
“There’s an interesting contrast between Australia and the rest of world, where you could argue pricing has moved ahead of the improvement in the fundamentals, and at some point Australia is going to have to catch up,” he says.
“Globally, we are still seen very much as a growth region where investment capital will continue to flow, and we’ve continued to see this in the current quarter, with approximately 50% of all purchases having been to foreign investors.”
Across Australia, prime office yields are set to contract by an average of 15 basis points up until 2016 in a tightening cycle that began in 2009.
More modest returns of between 10% and 15% are forecast for the Macquarie Park, Sydney suburban, North Sydney and Parramatta office markets.
Macquarie Bank and the Property Council of Australia’s joint autumn 2011 office report forecasts that Sydney prime office rents will rise to an average of $849 per square metre from a current level of $833 per square metres with yields declining slightly from 7% to 6.9% over this period.
Perth is forecast to have the dearest prime office market by January 2012, according to the Property Council and Macquarie Bank, with rents rising from $837 to $859.
Six out of eight commercial property experts polled in the report say Melbourne is currently the hottest prime office market, with Perth and Sydney picking up a vote each.
On the global front, CBRE head of research for Asia Pacific Nick Axford says that while uncertainty still prevails, there are now clear signs of stability in most major property markets around the world.
Hong Kong and Singapore are among the markets that have experienced strong growth in recent times.
However, he says capital markets are showing clearer signs of recovery than the occupational markets and the speed of the recovery varies markedly from region to region and from city to city.
“Prime property looks attractive relative to other asset classes, and this is driving global investor demand,” he says.
“Investors are targeting only the very best quality, prime-grade property with a focus on the quality of covenants and income streams and the larger, more liquid markets.”
Returning to Australia, CBRE forecasts a more modest total return of 10 to 13% for the industrial sector in Sydney, where leasing demand has improved and property construction activity has resumed, with a clear focus on the arc stretching from Port Botany through the M5 corridor and to the outer west.
Stanley says the retail property market is facing its biggest challenge in 20 years due to consumers saving and not spending, low household confidence and an accelerating online retailing sector.
According to Stanley, there is still significant potential for more global retailers to come into the Sydney market, which is currently running second to Melbourne in regard to the representation of global retailers.
“Sydney has suffered from an overall low and falling ranking in global retailer representation by world standards. An increase in global retailer numbers would help fill the higher-than-usual vacancy in the retail sector, sustain the current high rentals and help bring the wow factor back into the retail sector.”
