m3commentary SYDNEY CBD OFFICE

Transcription

1 m3commentary SYDNEY CBD OFFICE Spring 2016 Key Research Contacts: Jennifer Williams National Director NSW (02) Erin Obliubek Research Manager VIC (02) Casey Robinson Research Manager QLD (07) Zoe Haskett Research Manager SA (08) Janis McLaren Research Analyst WA (08) m3property.com.au P1

2 CONTENTS Market Overview 3 Key Retail Influences 4 Key Indicators 5 Key Sales 7 Outlook 8 SYDNEY CBD MARKET FUNDAMENTALS STRONG Leasing demand has been strong, but is expected to moderate due to reduced availability of affordable, contiguous space. Supply levels were high over 2015 and are increasing to a market peak in Stock withdrawals to remain high over 2016 to DEFINITIONS Grade: is determined using the PCA report A Guide to Office Building Quality. Prime: Combination of premium and grade A. Secondary: Combination of grades B, C and D. Net lettable area (NLA): defined in accordance with the PCA Method of Measurement Completion date: determined by issue of a Certificate of Occupancy Pre-commitment: contract signed to occupy space in new or refurbished space prior to WALE: Weighted average lease expiry. Strong rental growth and falling incentives over the year to September 2016, particularly in secondary stock. Sales activity strong over the first nine months of 2016, albeit lower than the same time last year. Yields across prime and secondary offices continued to tighten over the year to September 2016 driven largely by strong demand from overseas and domestic investors and developers, combined with limited acquisition opportunities. Further tightening is expected in the short term. Emergency Services Property Levy changes to be introduced in July 2017 with potential to increase statutory outgoings. m3commentary Spring 2016 P2

3 MARKET OVERVIEW The Sydney CBD office market experienced strong tenant demand over the year to September Combined with stock withdrawals this contributed to vacancy decreasing, despite a considerable volume of building completions over the same period, placing upward pressure on effective rents. Yields tightened further over 2016 as robust investment demand continued on the back of strengthening market fundamentals. The Sydney CBD office market experienced high levels of supply, solid tenant demand, strengthening rental growth and a strong investment market over the past 12 months, making it one of the best performing office markets in Australia. Tenant take up in the CBD was strong over the year to July It is, however, expected to slow, in line with the decline in available space, particularly in secondary grade. In terms of leasing activity over the year to September 2016, gross absorption almost halved in the CBD compared to the same time last year, while suburban gross take up more than doubled indicating tenants may already be looking outside the CBD for accommodation. Demand from firms benefiting from low interest rates, strong property markets and a strengthening US economy are likely to drive demand for space in the CBD over the short term. This should result in the market continuing to expand. Total net absorption is, however, expected to moderate due to reduced availability of contiguous space and rising rentals in the CBD. This may result in occupancy cost sensitive tenants considering more affordable fringe locations as an alternative. Gross supply is expected to peak in However, withdrawals to stock and strong tenant demand, resulted in a fall in total vacancy over the year to July 2016 to 5.6%. Looking over the next three years, higher than average stock withdrawals are forecast with conversion to residential, hotel and mixed uses, redevelopments and the Sydney Metro being the main drivers. Investment activity was strong and yields firmed over the year to September 2016 due to continued strong investment demand. m3property Valuation: 28 O Connell Street m3commentary Spring 2016 P3

4 KEY INFLUENCES $ ECONOMIC GROWTH While economic challenges remain, headed by global uncertainty, changing exchange rates and volatile equities markets, there are also positives. According to the Australian Treasury, Gross Domestic Product (GDP) is forecast to grow by 3.25% in , after reaching 3.28% seasonally adjusted over the year to June 2016 (ABS September 2016). EMPLOYMENT While employment is expanding overall in Australia, differences between States remain. As at August 2016 employment in New South Wales totalled 3,804,984 people and grew by 2.4% over the past 12 months. This has helped push the unemployment rate in New South Wales down to 5.0% as at August 2016 from 5.9% a year prior. JOB ADVERTISEMENTS The latest job advertisements data from ANZ (a forward-looking indicator of labour demand) indicates an increase in employment in the short term. This is consistent with the slow transition in the labour market and the economy, more generally, towards service based industries and sectors which benefit from a lower Australian dollar and low interest rate. Job advertisements have risen over the year to August 2016 by 8.0%. BUSINESS CONFIDENCE National Australia Bank s (NAB) index of business confidence rose to 6.0 index points in August This is equal to the long term average for business confidence and represents a positive result. Business conditions (which is a combination of trading, profitability and employment conditions) reduced in August, to 7.0 index points. This is the lowest business conditions level since January The index is, however, still above the long term average of 5.0 points. m3property Valuation: 35 Clarence Street m3property Valuation: 287 Elizabeth Street m3commentary Spring 2016 P4

5 Net absorption (m 2 ) NLA (m 2 ) Number leases reported as signed Supply (m 2 ) m3property Research KEY INDICATORS 320, , , , , ,000 80,000 40, ,000-80, , , , , , , ,000 50, , , , ,000 Sydney CBD Office: Annual Net Absorption 16 year average Sydney CBD Supply Net supply Gross supply Source: Property Council of Australia OMR July 2016 m3property Research September , , , ,000 80,000 60,000 40,000 20,000 0 Sydney CBD Leases Signed Southern The Rocks Western Walsh Bay Midtown Core No lease signed Source: Property Daily and m3property STOCK AND SUPPLY Stock in the Sydney CBD office market totalled 5,082,215 square metres as at July This is expected to be supplemented by 155,224 square metres of gross supply over the second half of 2016, including the completion of Barangaroo T1 (101,729 square metres) and 333 George Street (12,514 square metres). New supply will largely be offset by 112,432 square metres of stock withdrawals, bringing net supply over the full year to 58,535 square metres. The year to December 2017 is expected to differ significantly. Forecasts by m3property expect moderating levels of gross supply, totalling around 71,000 square metres. The level of withdrawals is expected to reach over 175,700 square metres, resulting in net supply of -104,736 square metres. The year to December 2018 is expected to again see above average withdrawals to stock while supply is expected to reduce further. The City of Sydney Council have released the draft Central Sydney Planning Strategy which proposes to require new towers, over 55 metres in height, to have at least 50% commercial space. For 100% commercial towers developers would be able to build up to 300 metres, depending on location (from 235 metres at current), a 28% increase in height. While this is unlikely to assist the current under-supply situation it is a strategy that will benefit the CBD longer term and keep it viable as a global office market. GROSS ABSORPTION Gross absorption based on reported signed leases was estimated by m3property to be around 262,604 square metres over the year to September This represents a decline of 26.1% compared to the year to September The number of moves, however, increased over the year to September 2016 compared to the year prior. This was reflected in the average size of leases signed falling to 1,716 square metres from 2,486 square metres. Gross absorption is expected to continue to fall as available space contracts. NET ABSORPTION Tenant demand was well above long term averages in the Sydney CBD over the year to July 2016 with 147,245 square metres of net absorption recorded, according to the Property Council of Australia. Looking forward, net absorption is expected to remain positive over the medium term outlook but lower than recent levels. This is based on slowing levels of leasing activity, which is a leading indicator of net absorption and the lack of available space in the market, particularly in secondary grade stock. Source: Property Council of Australia OMR July 2016 m3property Research September 2016 m3commentary Spring 2016 P5

6 Incentives (%) Gross face rents ($/m 2 ) Vacancy Rate (%) m3property Research KEY INDICATORS VACANCY Sydney CBD Office: Vacancy 14.0% 12.0% 10.0% 8.0% Average 6.0% 4.0% 2.0% Secondary Prime Total 0.0% Source: Property Council of Australia OMR July 2016, Sydney CBD Average Gross Rents $1,600 $1,400 $1,200 $1,000 $800 $600 $400 Prime $200 Secondary $- Source: m3property Research The Sydney CBD vacancy rate, driven by strong tenant demand and withdrawals to stock, fell over the year to July 2016 from 6.3% to 5.6%. It now lies well below the 20 year CBD average of 7.4%. Secondary stock withdrawals (99,997 square metres) have almost doubled prime withdrawals, over the year to July 2016, resulting in a fall in secondary vacancy from 6.3% to just 4.1%. Completions of prime space totalled 275,972 square metres over the year to July 2016, resulting in prime vacancy increasing from 6.3% to 6.7%. Looking forward the vacancy rate is forecast to continue to fall until the end of This is due to the high level of stock withdrawals expected over the period with around 460,000 square metres due to be removed from stock for refurbishment, redevelopment and the Sydney Metro stations, from the second half of 2016 to the end of From 2018 to 2020 further increases to supply from potential projects such as Quay Quarter, Wynyard Place, 60 Martin Place, CQ Tower at George Street and Pitt Street, 151 Clarence Street and 388 George Street are likely to result in vacancy gradually increasing. RENTS Prime gross face rents in the Sydney CBD have increased over the 12 months to September 2016 with an average increase of around 3.8% being recorded for prime and 9.7% for secondary office space. Stronger rental growth is expected for both grades over the year to September 2017 due to forecast low vacancy and continued positive demand. Affordability of space is likely to increasingly become a factor over 2017 for secondary grade stock where vacancy is expected to decrease to below 2.0%. Higher rents are expected to result in the displacement of some tenants from the CBD to fringe locations. 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Source: m3property Research Sydney CBD Incentives Prime Secondary INCENTIVES Despite falling over the year to September 2016, prime incentives have remained high in the Sydney CBD ranging from 22.0% to 28.0% as at September This is largely due to the recent and upcoming completions within Barangaroo and associated backfill space. Prime incentives are expected to continue falling over the next few years as vacancy falls. Secondary incentives, on the other hand, have fallen significantly over the past six months as availability of stock has reduced. Secondary incentives as at September 2016 ranged from 12% to 18% and are expected to continue to decline over the next two years. m3commentary Spring 2016 P6

7 Average yields Sales volume ($millions) Prime outgoings ($/m 2 ) m3property Research KEY INDICATORS $200 $180 $160 $140 $120 $100 $80 $60 $40 $20 $- Sydney CBD Outgoings Prime Secondary EMERGENCY SERVICES PROPERTY LEVY From 1 July 2017, the NSW Government will abolish the Emergency Services Levy (ESL) on insurance policies and replace it with an Emergency Services Property Levy (ESPL), which will be paid alongside Council rates. While the amount of the levy is yet to be determined, experience from interstate indicates that the new levy will be higher than the existing levy, which will be abolished. This may result in an increase in outgoings and therefore could result in higher occupancy costs. Source: m3property Research 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, Sydney CBD Office Sales Volume * Source: m3property Research *Office Sales over $5 million to end of September 2016 INVESTMENT MARKET Recent transaction activity has slowed and has been focused on secondary grade assets with prime assets being tightly held. Sales over the year to September 2016 were approximately $2,892,871,500, compared to $4,788,850,000 over the year to September Overseas investors have maintained strong investment activity in the CBD over the past few years accounting for 21.0% of sales over the year to September 2015 and 37.8% of sales in the year to September Unlisted trusts have been the other major purchaser group accounting for 52.2% of sales in the year to September 2015 and 23.8% over the year to September Developers (14.2%) and private investors (14.0%) accounted for the next largest proportions of sales over the year to September 2016 with both these groups increasing their portions compared to the same time last year. 9.00% 8.50% 8.00% 7.50% 7.00% 6.50% 6.00% 5.50% 5.00% 4.50% 4.00% 6.38% Sydney CBD Yields 7.25% 5.63% Prime Secondary 8.50% 5.50% 6.00% YIELDS Prime yields tightened by around 25 basis points over the 12 months to September 2016, to range between 5.00% and 6.00%. Over the same time frame grade B yields tightened by around 100 basis points to range from 5.50% to 6.50%. Low interest rates, strengthening market fundamentals and strong capital flows into property have largely driven this tightening in yields in the CBD. Source: m3property Research m3commentary Spring 2016 P7

8 SIGNIFICANT SALES TO DATE Property Date Price Passing Yield Market Yield IRR $/m 2 Purchaser 333 Kent Street Oct 16 $88,888, % 5.56% 7.43% $8,938 iprosperity and Bridge Capital 140 Sussex Street Sep 16 $130,000, % 5.46% 6.69% $10,450 Bank of China Global Investors 28 O'Connell Street Sep 16 $91,000, % 5.03% 5.63% $14,809 Coombes Property Group 287 Elizabeth Street Jul 16 $55,000, % 5.22% 6.09% $9,392 Overseas Investor 1-19 Shelley Street May 16 $535,000, % 5.21% 6.97% $16,441 Charter Hall and Morgan Stanley 10 Quay Street May 16 $42,000, % 4.16% 4.84% $10,825 George 777 Pty Ltd 420 George Street (75%) Apr 16 $442,500, % 5.34% 7.20% $15,655 Investa Property Group 151 Castlereagh Street Mar 16 $120,000, % 5.71% 6.96% $9,336 Deutsche Asset Management 61 York Street Feb 16 $33,000, % 5.26% 6.86% $10,676 Levanai Nominees Pty Ltd 77 King Street Jan 16 $160,000, % 5.60% 7.38% $11,635 Invesco Asia Core Fund m3property Valuation: 20 Hunter Street m3commentary Spring 2016 P8

9 OUTLOOK SYDNEY CBD OFFICE Net supply is expected to be limited over the second half of 2016 before falling substantially in 2017 and remaining negative in Supply is forecast to increase again from 2019 to Net absorption is forecast to be moderate, over the next few years in part due to the lack of available contiguous space, particularly in secondary grade stock. This is likely to pressure tenants to consider fringe and suburban markets for larger space requirements. Vacancy rates are expected to continue to fall over the second half of 2016 to the end of Positive demand should result in pre-lease activity rising over the next few years, driving new development activity from 2019 to Forecast development activity in this period is expected to result in an increase in vacancy over those years. Prime gross face rents are forecast to increase by over 6.0% over the year to September Secondary space is expected to see stronger growth of closer to 9.0% over the year. Incentive levels are also likely to reduce over the year. Sales activity is expected to be solid in 2016 but is unlikely to reach the record sales volume achieved in 2015 due to a scarcity of transaction opportunities. Overseas investors continue to pursue investment opportunities in the Sydney CBD. Investment yields are set to tighten over 2017 driven by strengthening fundamentals and continuing investor demand. KEY COMMERCIAL VALUATION CONTACTS Andrew Duguid Managing Director NSW (02) Don Semken Senior Valuer NSW (02) Simon Hickin Director SA (08) Gary Longden Director VIC (02) m3property provides national coverage in all States and Territories. info@m3property.com.au Ross Perkins Managing Director QLD (07) Gavin Chapman Managing Director WA (08) DISCLAIMER m3property Australia. This report has been derived, in part, from sources other than m3property. In passing on this information, m3property makes no representation that any information or assumption contained in this material is accurate or complete. To the extent that this material contains any statement as to the future, it is simply an estimate or opinion based on information currently available to m3property and contains assumptions which may be incorrect. m3property makes no representation that any such statements are, or will be, accurate.