With employment growth showing shoots of improvement across the broader Sydney office markets, the rental market is showing signs of recovery in some isolated areas. The Sydney South market is going through resurgence at the moment with limited quality stock available as more properties are being removed from the market than being added. This lack of supply of quality office accommodation has been instrumental in new highs being achieved in rents across the South; the last 18 months showing strong increases of 11.0% for prime to $372/sqm net face, with secondary also faring well up 9.2% over the same period to $275/sqm. Quality spaces with modern fitouts are highly sought after creating excitement in the prime South Sydney market which has attracted improved retail and supporting infrastructure. The Fringe market however is more aligned to the Sydney CBD and has shown some steady improvement averaging between 3.0% and 3.5% over this period and continues to yield higher rents than the South albeit this slow rate of grow somewhat trending slightly above CPI.
Capital values have shown some significant changes over the past five years; the Sydney South market witnessing sizeable and consistent growth over 6.0% per annum to currently average $4,075/sqm, however evidence suggests values do range considerably with capital values in 2015 ranging up to $6,700/sqm. Looking historically, values in South Sydney saw strong growth in the lead up to the GFC and promptly saw a sharp correction during 2009 during two periods of limited turnover. The City Fringe however has shown quite contrasting results, after recording a contraction in value during 2008, capital values continued on a downward trajectory to their low in 2014 of $4,072/sqm. Results however in 2015 has shown a severe uptick bringing the average value to $6,678/sqm due to a number of sales recorded in Jones Bay Wharf attracting value highs, we expect that over the course of the year with a greater volume of transactions throughout the region, this will normalise albeit up on 2014 results.
Despite market fundamentals still mixed across the broader office markets of Sydney, there has been a uniform movement downwards in investment yields over the last 12 to 18 months. Demand for property for alternative uses and investors looking for greater longer term land banking opportunities have significantly compressed the average yield for office property in both the South and Fringe markets. Currently prime yields for the Fringe average 7.00% with the gap between South narrowing now averaging just 7.25%. These rates are indicative of an average for this location and can range 50–75 basis points on either side of this rate. The Secondary market has also compressed and now the differential in prime and secondary representing approximately 100 basis points compared to closer to 200 basis points post GFC. Similarly the range in secondary is vast and somewhat higher than prime, particularly for those lower grade assets which are not well located, yields for these properties can range as high as 10.0% across both locations.