Income to lift capital city office markets

Meanwhile, the Sydney occupier market has experienced an extraordinary year with stock withdrawals coupled with demand, leading to strong effective rentals being experienced across all sectors, particularly B Grade stock.

Sydney CBD vacancies edged up over the last six months from 5.6 per cent to 6.2 per cent, which is partly related to the reduced tenant footprint associated with big tenants moves such as PwC and HSBC to Barangaroo.

Fraser believes that Sydney CBD vacancy rates should fall to below five per cent over the next two years.

“Accordingly, I can see the suburban markets, especially North Sydney benefitting. All eyes will be on the movements of NBN, Coca Cola Amatil, Flight Centre, Mastercard and Veda,” he says.

In comparison, Melbourne occupier markets also experienced a solid year, with balance found between demand and supply. Moderate effective rental growth was recorded.

Melbourne CBD vacancies tightened up further over the last six months, from 7.0 per cent to 6.4 per cent. Strong net absorption of 117,000sqm for the full year was recorded – the best in the nation.

Fraser says that “the capital markets have done a great deal of the ‘heavy lifting’, with yields having markedly dropped for prime – 200 basis points over the last two years. Despite bonds jumping in late 2016, the bonds and interest rate outlook has moderated, and therefore we expect to see the “lower for longer” theme continuing for some time yet.

Offshore capital continues to look to the Australian markets for opportunities and this is expected to continue. Competition between domestic and offshore capital investors is expected to remain a continuing theme.

“Sydney and Melbourne prime yields are now below five per cent. Whilst the yield cycle is now maturing, we are likely to see some yield tightening in selective asset classes or markets with superior income appreciation prospects.

“Therefore, it is Brisbane that could well see the relative value play come to the fore, where yields presently remain some 150 to 200 basis points above that of Sydney and Melbourne”.

To find out more about the Property Council’s Office Market Report or how we can help you on your next valuations or transactions project, contact our Real Estate Advisory experts in the commercial sector.