Commercial real estate company Colliers shares its observations on NSW property trends for 2016 and what can be expected in the new year – covering sectors including office and retail leasing, and real estate management.
Office Leasing
According to Cameron Williams, National Director, Office Leasing, Sydney CBD at Colliers International, 2016 was the turning point for the city as it tipped in favour of the landlord as a result of hundreds of tenants being displaced due to redevelopment, conversion to another use or the Sydney metro project.
“During the year, B grade core rents for suites up to 500sqm experienced double-digit face rental growth whilst incentive levels dropped to average around 12 to 15% of gross lease value.
“The premium core CBD market responded to the demand by subdividing floors and in some buildings by providing speculative fit-outs. Competition for small well-located core secondary tenancies sub 500sqm and sub $1,000/sqm pa gross is intense.
“We expect the market to tighten further in 2017 as tenants from 71 Macquarie Street, 5 Elizabeth Street and 50 Bridge Street are forced into the market.”
Williams went on to say that vacancy in Barangaroo is tempering rental growth in the prime market, particularly for larger tenants, however it is expected that this dynamic will change in favour of landlords as commitments fall into place during the first half of 2017.
“The financial gap between renewal deals and new lease transactions is widening as landlords leverage off the tightening market. With very little significant new office supply coming online during 2017 and 2018, effective rental growth well above historic averages will continue,” he says.
Dan Walker, Director in Charge, Sydney North at Colliers says there is an increase in demand for strata sales stock as SMSF funds continue to look for locations to store their wealth with interest rates so low, in addition to tenants being displaced as above and SME’s wanting to take control and ownership of their operational office/warehouses.
“In 2017, we will continue to see increasing demand from office tenants who cannot find space in the CBD due to low vacancy, being forced to ‘cross the bridge’ to the North Shore and then on flow into suburban markets like Macquarie Park.
Real Estate Management
Michael Rowlands, National Director, Real Estate Management, at Colliers International, reports that over the last 12 months there has been strong demand for city fringe spaces, leading to increased rental growth, driving reduced incentives.
“Tech companies continue to take a space within the fringe market, with the likes of Trip Advisor securing a 27,0000sqm space in Redfern. Australia Post continues to downsize, and print media companies such as Readers Digest are moving out of Ultimo.
“With the rise of tech companies and an increase in millennials within the workforce, there is strong competition for staff. Historically, tech companies have started in small suburban tenancies, however this increased competition for staff has resulted in a clear focus on location and amenities. Whilst the perception exists that tech companies are looking for warehouse type fitouts, recent trends have shown the importance of acquiring a tenancy whereby the building’s standards meets their technology requirements.
Whilst the city fringe boasts some of Sydney’s most historic buildings, Rowlands believes that futureproofing your asset is vital to secure major tenants and retain staff, now and in the years ahead.
Retail
“As of the third quarter of 2016, the average spread between Australian regional retail asset yields and risk-free rates was 3.69 percent, or two standard deviations away from long term historical averages (and far higher than what they averaged over the past 20 years),” says Daniel Lees, Director of Research for Colliers International.
“In light of this, we expect there is room for retail property yields to compress further, thanks to low interest rates, but we expect that more transactional activity within the retail sector should reprice the market closer to where historical spreads deem these shopping centres should be.
“Australian shopping centre rents across all states and categories grew +0.62% over the year to 3Q16 and over the next 12 months to 3Q17; we expect this growth rate will increase to +2.14% on average” he says.
Regional yields remain tightest in Sydney and Melbourne at averages of 5.5 per cent and 5.63 per cent respectively. Yields in Brisbane and Perth are both averaging 5.75 per cent although the range is slightly wider in Brisbane. Meanwhile, Adelaide yields are marginally higher, averaging 5.88 per cent. Given the wide spreads on offer within the sector, Colliers believes transactional evidence will reprice the market, bringing spreads closer to long-term historical averages.
“Looking forward to 2017, we expect that gross face rents within shopping centres will experience growth over the coming 12 months, based on a mix of CPI-linked contractual increases and our forecasts for increasing retail demand. Our outlook for further rental growth is supported by institutional commentary during the most recent reporting season, where landlords including Charter Hall Retail REIT, Mirvac, Shopping Centres Australia, GPT and Vicinity Centres noticed positive releasing spreads in a range of 0.5 per cent to 7.5 percent,” says Lees.
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