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Sydney CBD is the largest office market in Australia with over 4.74 million square metres of stock. The CBD market is currently comprised of 48% prime grade space (buildings of either premium or A grades) and 52% secondary grade space (B, C & D grades). |
There are many fundamentals that need to be considered when investors are looking to buy commercial property in the Sydney CBD. We have listed 7 of these important fundamentals and the impact the current downturn has had on them.
1. Vacancies
The Sydney CBD vacancy rate across all classes as of January 2010 was 8.1%, slightly up from 7.8% in July 2009. The current vacancy rate is below the predictions made by market analysts at the start of 2009 which were around 9%. Vacancy rates are expected to trend up to above 9% during the next 12 -24 months.
2. Sublease space
The amount of sublease vacancy in the Sydney CBD has increased significantly over the last 12 months due to the effects of the GFC. The amount of sublease space on the market appears to have peaked in September 2009 at around 80,000m2 or 1.7% of the total Sydney CBD stock.
3. Future supply
There is forecast to be 130,781m2 of new space added in 2010 and 139,159m2 added in 2011, this represents an increase in the total Sydney CBD space of 2.75% and 2.93% respectively. The current supply cycle is expected to peak in 2011 with the completion of major projects including Darling Walk at Darling Harbour which has 56,000m2 of space which is already 100% fully committed to the Commonwealth Bank of Australia. The supply outlook is fairly benign though with 4.5% of total stock under construction and 45% of this space has already been pre-committed by tenants.
4. Incentives
Recent evidence to date suggests incentives may have stabilised at between 25% and 35%. On average incentives have increased by 15% across all precincts and grades in the Sydney CBD over the last 12 months to September 2009.
5. Gross and net face rents
On average gross rents have softened by 1% to 3% to September 2009 across the Sydney CBD since the peak of the market in 2008. Investors looking to buy commercial property in the CBD should also consider the fact that net effective rents (i.e. after incentives) have softened by 25% to 30% over the last 12 months.
Average gross face rents in the Sydney CBD across all precincts as at December 2009 were:
Premium grade space - $845/m2 to $1,330/m2
A grade space - $655/m² to $965/m²
B grade space - $485/m² to $625/m²
Some recent leasing deals include;
• 68 York St, which was leased in November of 2009 for around $725/m2 gross. The lease was for 1,007m2 of space in a brand new prime grade building for a 7 year term. The lease included an incentive of 32%, which was structured as a blend of fit out contributions and a rent free period.
• 133 Castlereagh St, which was leased in November of 2009 for around $631/m2 gross. The lease was for 406m2 of space in a B+ grade building for an 8 year term. The lease included an incentive of 31%, which was structured as a blend of fit out contributions and a rent free period.
• 66 Clarence St, which was leased in January of 2010 for around $570/m2 gross. The lease was for 518m2 of space in a B grade building for a 5 year term. The lease included an incentive of 28%, which was structured as a blend of fit out contributions and a rent free period.
6. Yields
Market yields have increased over the last 12 months which is encouraging investors to buy commercial property in the Sydney CBD. Prime grade property has increased by around 100 basis points to between 7% and 8% and secondary property has increased by around 150 basis points to between 8% and 9%.
7. Recent sales activity
Sydney CBD typically has the highest number of investment transactions in the country averaging $1.7 billion in office stock changing hands each year. As a result of the downturn there was only $575 million of Sydney CBD stock traded in 2008 and only $71 million traded in 2009 up until September.
Most of the sales that occurred in the Sydney CBD in 2009 were a mixed bag of secondary grade office buildings and development sites. As a result investors looking to buy commercial property in the Sydney CBD have not had many quality properties to consider.
Some recent sales include;
• 234 Sussex St, which was sold in November of 2009 for around $46 million. The B grade building has 12 levels and a net lettable area of about 11,000m2. The sale showed a yield of about 8.3%.
• 80 Clarence St, which was sold in the January 2009 for $29.95 million. The B grade building has 12 levels and a net lettable area of 5,559m2. The sale showed a yield of about 8%.
• 174 Liverpool St, which was sold in December of 2009 for $2.35 million. The strata space was in a B grade building. The sale showed a yield of about 8.6%.
| If you are looking to buy commercial property in the Sydney CBD or would like to know more about the considerations of investing in commercial property please contact one of our commercial property buyers agents on 1300 664 373. |
NB: Information in this article has been sourced from various sources including Colliers International, Savills, Property Council of Australia, Landmark White, Ray White Commercial and CBRE.
