Sydney Commercial Property 2018
May 1, 2018 / Written by Rich Harvey
The commercial property market has well and truly found its direction for 2018.
There are opportunities for savvy investors – particularly those graduating beyond residential and into higher cash flow holdings with long-term tenancies. In most cases, outgoings are included in commercial rent as well… that will have residential landlords salivating!
Here’s our assessment of Sydney’s commercial property market for the remainder of 2018, including our top picks for investors looking to profit.
State of play
There’s no doubt Sydney commercial property had a stellar 2017.
One of the growth drivers was a ‘flight to yield’ as investors sought to secure holdings with a decent return. Another key driver has been the compulsory acquisitions of commercial buildings to make way for the expanding Sydney Metro stations. This has meant a tight market has been made even tighter driving up prices.
Buyers were diverse. Mum-and-dad investors were among the mix with many feeling that housing was coming to the end of its five-year hot run, so commercial space became a great place to park capital.
Purchasers also included owner-occupiers looking to acquire their own square metres, with small offices proving particularly appealing.
In addition, the more expensive end of the market saw large institutional investors – including local managed funds and international purchasers – fuel value gains.
Office space became a primary focus for buyers, and there’s been some interesting changes in this sector over the past year or so.
From a tenant’s point of view, the catch phrase ‘flexible space’ and the rise of the hot-desk worker were big news. These sorts of serviced office arrangements were once just the domain of start-up companies and solo freelancer. Now, some larger organisations are keen to get on board as a way to reduce rent costs and take advantage of the higher densities offered by shared office space.
Where to go
Prime office holdings in the CBD and North Sydney saw rental growth in the order of 16 per cent last year helping drive prices even higher. While that sort of impressive outcome is hard to maintain, current rental growth rates are tracking at around 10-to-15 per cent – still a very solid result.
Value growth isn’t over yet and we see opportunities for buyers to continue to be part of this good news story.
As a very broad rule of thumb in real estate investment, the higher the quality of the property, the lower it’s rental yield on purchase price (known as the ‘passing yield’).
This is because there’s more growth potential on the capital gains side of the equation, costly building upgrades are not required for years to come and there is generally less risk of not finding a tenant.
Prime office property still presents fantastic opportunities for those able to capitalise on them, with relatively high yields compared to residential property, long lease terms and minimal maintenance.
The key here is quality – and frankly, why wouldn’t you be buying A-grade stock right about now?
The yield difference between prime and secondary stock is tightening – the margin is now at a historical low of only 0.3 per cent. That means you can buy a B-grade commercial property in the CBD returning around 5 per cent, or a lower risk A-grade property with superior growth prospects in return for sacrificing 0.3 per cent of that rental return. Keep in mind that these are net returns after building expenses! At these tight yield margins between prime and secondary property, investors will be keen to purchase more A-grade stock.
Out of town.
The CBD has a lack of large floor space so some major businesses are heading to city-fringe addresses such as Ultimo, Darlinghurst, Surry Hills and down to Darlington/Redfern.
Vacancy rates are extremely tight at three per cent, while median yields sit at 5.4 per cent.
Here’s another thought if you are chasing a higher yield – head north.
Office space yields in North Sydney for prime property are similar to those for secondary property in the CBD. Plans to boost transport options via new driverless trains in 2019 only bode well for its commercial real estate.
In the south, yields for prime stock are a little better than in the CBD too. Seek spots with a train station anywhere between town and Redfern.
The interesting thing about south Sydney is the growth in creative businesses who are looking for space that suits teams. Reclaimed industrial areas are being converted to include attractive lifestyle facilities as well as commercial office space.
There is also a stack of rezoning areas around Sydney in areas where new infrastructure is going in which will allow significantly more commercial space. Exciting times!
Overall the news in 2018 will remain good but buyers must be selective. Use a trusted source like a specialist commercial buyers’ agent to not only find the right properties but also run the numbers and comparisons to ensure you get the best possible commercial return.