NSW office metro markets set to shine

GUEST OBSERVER

Office metro markets, like CBD markets, are driven by factors which differ from state to state and region to region, so any discussion of a ‘national’ metro market only serves to mask the various drivers of each of these markets. 

There’s no question that long-overdue Infrastructure investment along the eastern seaboard will be the primary driver of growth in metro markets in the coming decade.

According to Colliers Metro Office Research and Forecast Report- first half 2016, over 33 buildings in Sydney’s metro markets will be compulsorily acquired for the Metro Rail, putting downward pressure on vacancies and upward pressure on rents. In fact, many metro markets are now at a tipping point, with the first real opportunity since the GFC to experience significant growth.

But where will the positive effects be most strongly felt?

NSW is where the strength is

At the moment, the NSW state economy is the strongest in the nation, with robust employment growth and a healthy surplus. It is also the hub for infrastructure development, with projects like the Sydney Metro, WestConnex and the Parramatta Light Rail set to come online in the next 10 years.

The most recent state budget revealed a total spend of $68.6 billion over the next four years alone, a very positive scenario for those metro markets in line to receive infrastructure upgrades.

This is because efficient transport links allow for greater connectivity across all metro markets, and in turn, increase the attractiveness of metro accommodation to a broader tenant base.

In further good news, the stock withdrawal story we are seeing in the Sydney CBD market holds true in a number of other NSW metro markets. Colliers reports that between January 2015 and January 2016, metro office stock decreased Australia-wide from 7.34 million sqm to 7.29 million sqm as a result of withdrawal for residential conversion or infrastructure development.

As the same time, we have not seen the same influx of offshore money into these markets as we have in the major CBD office markets. With offshore investors continuing to favour CBDs, investors in metro markets are still predominately domestic. The proportion of domestic investors, compared with international investors is continuing to grow with Colliers reporting that domestic investors made up 55 percent of the acquisitions in 2013, 60 percent in 2014 and 65 percent in 2015.

Centuria’s ASX-listed Metropolitan REIT invests purely in metropolitan office and industrial assets across Sydney, Brisbane, Canberra and Adelaide. These assets have been valued at $396.7 million. Decreasing vacancies and increasing values have seen this fund trading well amongst both institutional and retail investors, highlighting the investor appetite for metro investment.   

Sydney’s north shore metro markets set to shine

In our view, some of the strongest metro markets are to be found on Sydney’s north shore, where the positive combination of residential conversion with acquisitions made for Metro stations will translate into improved vacancy and rental levels in the next few years.  

For example, fifteen commercial properties will be demolished along the north shore, in to make way for the Sydney Metro. At the same time, all new development is focused on residential accommodation, and with no new commercial development slated we expect a further tightening of supply and upward pressure on commercial rents.

As a result of the positive fundamentals, Centuria recently completed the purchase of part of the Zenith office tower in Chatswood, an area which we see as a major beneficiary of the Sydney Metro. Stage 1 from the northwest to Chatswood is scheduled for completion in 2019, and the second stage from Chatswood to the southwest via the CBD will put Chatswood right at the heart of Sydney’s transport network.

The most recent PCA figures show vacancy rates have dropped back to 6.6 percent in Chatswood which is the lowest vacancy rate for many years. We also expect demand to increase further due to the strong transport links already in place in Chatswood and the absence of any significant increase in supply. 

Looking forward, we are confident that Chatswood status as a major commercial and residential hub will be cemented by the benefits of the major infrastructure spend by the NSW State Government. 

Positive fundamentals in the CBD fringe, particularly in the south

Vacancies continue to fall in the city fringe as a result of leasing growth on the back of demand from tenants displaced by withdrawals for infrastructure and residential projects in both the CBD and locally.

The Southern CBD and fringe areas are undergoing a renaissance on the back of proximity to the rapidly growing residential area of South Sydney as well as demand from tenants displaced by the metro line. This area is particularly popular with advertising and media companies, resulting in over 10,000 sqm of demand in the six months to January 2016, according to Colliers. 

In late 2015, in conjunction with Mirvac, we acquired commercial property within the Australian Technology Park south of Sydney. The site is 14 hectares, three kilometres south of the Sydney CBD on the site of a $1 billion development for CBA, which we believe will have wide-ranging positive impacts on the broader Central to Eveleigh corridor.

So what’s the bottom line?  Our house view is that tenant demand for metro locations will continue to strengthen as CBD vacancy rates fall. Withdrawal of A and B grade stock for residential conversion and/or infrastructure development will leave many tenants in this market seeking cost effective solutions in those suburbs with good (and improving) transport links.

This means markets such as Chatswood, and the southern fringe of the CBD are likely to benefit. We have already taken advantage of a number of opportunities with compelling value, such as our purchase, in conjunction with global investment manager BlackRock, of The Zenith in Chatswood.

Ultimately, we remain convinced that the fundamentals of these metro markets in NSW make them ideally suited to providing stable, high yields and potential for capital growth that our investors have come to expect.

 Jason Huljich is chief executive officer, Unlisted Property Funds for Centuria.