Capital Business: Sydney CBD Office Market Bounces Back

“You can only buy Sydney CBD office for one or two years in a 10-year cycle.” And it would seem the starter’s gun has fired with a number of recent transactions punctuating the city’s resurgence. The bellwether market is showing strong signs of recovery as yield softening stabilises, according to Colliers head of office capital markets Adam Woodward. And the international capital is flowing in. US-headquartered global investment manager PGIM alongside Proprium Capital Partners splashed $250 million on the Stock Exchange Building on Bridge Street, while Investa Property Group and US-based real estate investor BGO dropped $580 million on 10-20 Bond Street. And Singapore Land Group and Singaporean UOL Group partnered to nab a Sydney CBD office block, 388 George Street, for $920 million. That deal attracted the highest per square metre rate in Sydney’s CBD this year at $22,386 a square metre. ▲ Brookfield has sold its stake in 388 George Street to subsidiaries of UOL Group in Singapore. “We’re definitely at a flex point of a new cycle, but the two-year timeline it has taken to get there has been painful,” Woodward says. “Sydney has always been the first market to recover from any kind of downturn.” Woodward says there have been eight transactions in the core market that made it “very hard to dispute” the turning point had been reached and that valuations are at the right level to enable transactions to take place. According to Woodward even the “very good assets” recorded a 10 per cent valuation writedown while lesser assets recorded up to 25 per cent devaluations. “The other markets in the metro space and further afield have been hit much harder but they actually haven’t recalibrated yet (because there hasn’t been enough transaction activity),” he says. “There’s been no evidence, and no demand for assets outside of Sydney’s core CBD market. The capital that has come back into the market is very discerning and looking for trophy assets.” Top Sydney CBD office transactions in the past 12 months Building Buyer Seller Price Per sq m Cap rate Agent Stock Exchange Building at 20 Bridge Street PGIM and Proprium Capital Partners Early Light International $250m $12,560 7% Knight Frank Exchange Centre at 10-20 Bond Street Sydney Investa Property Group and BGO Mirvac $580m $15,131 - McVay Real Estate IAG House at 388 George Street UOL Group and Singapore Land Group Brookfield $920M $22,386 6.2% Colliers 1Castlereagh Street Metro Holdings in joint-venture with Sim Lian Group Early Light International $190m $15,309 6.5% Knight Frank 333 George Street Deka Immobilien Charter Hall $392m $27,020 - Knight Frank 5 Martin Place Cbus Property CPP Investment Board JV Dexus $592m $17,952 6.1% Colliers 55 Pitt Street Mitsui Fudosan Mirvac $1.97bn $28,139 - CBRE ; Knight Frank NAB House 255 George Street Keppel REIT Mirvac Group $727.6m $18,658 6% Cushman &amp; Wakefield JLL Source: MSCI Real Capital Analytics New narrative in office market The conversations in Sydney’s CBD office towers are changing. While it was much harder to sell an asset, the values of Prime and A-Grade assets are rising once more and asset owners are now looking to hold. “Conversations are already a little bit different with potential vendors around either not wanting to sell Sydney at the moment or wanting premium value to sell it,” Woodward says. “And we’ll start to see, as the financial core tightens, more deal flow in the western corridor into midtown and other parts of the city that aren’t trading as much at the moment. There will be more confidence from buyers to buy into those parts of the city. “In Sydney’s CBD there’s no new supply coming, it doesn’t stack up at the moment … which is very good for incumbent owners, especially owners of the high-quality stock.” ▲ Woodward says 20 Bridge Street, the former ASX building in Sydney is a “roll your sleeves up” value-add play. But it’s not just the high-quality assets that are transacting in the CBD, as opportunities in the geographically constrained market remain limited. Woodward says there has been a good spread of transactions with prime grade assets such as 55 Pitt Street and 333 George Street achieving mid to high-5s cap rates. “Then you’ve got the very good quality A-grade which traded within that 6 to 6.5 per cent band, and that was the rump of the deals last year, including 255 George and 388 George, they’re very good A-grade assets with strong covenants,” he says. “Some more secondary or challenged assets have gone through, like 20 Bridge Street, that’s where the ASX is moving out of . That’s a proper roll your sleeves up, value-add play.” Dry pipeline good news for existing owners Woodward says the delivery challenges within the construction industry continue to plague the supply pipeline but it has a silver lining for asset owners. “To pull together a site and then to get planning approval is a real challenge. It takes five to 10 years to do that, and then once you’ve got approval and the feasibility stacks up and the conditions are in favour to pull the trigger to start developing, it’s a three-year build job,” he says. “Flight to quality has been the only key thematic from an occupier perspective post-Covid. There were so many hypotheses about what might happen and what tenants might do, and all the terminology of hub and spoke and the satellite office and the work-from-home piece, that’s all disappeared. “The only thing that’s apparent is that tenants have upgraded from either space in the city to better buildings or have actually come into the city from metro markets.” ▲ Colliers head of office capital markets Adam Woodward believes the Sydney CBD will perform strongly this year. Woodward says the lack of supply that will drive new growth is going to push strong effective rental growth. “Face rents are going up and at the same time incentives are coming down, particularly in high quality buildings.” “You’ve got interest rates from a macro perspective stable ... so that gives investors confidence generally that pricing has bottomed and will improve. The valuers have already got to that point on 31 December, which is great from a valuation perspective. And then the fundamentals from an occupier perspective are also much stronger. “So there’s three key sections there that all have tailwind conditions to them finally. It gives everyone confidence that we’re in for a very strong year.” And while deals are taking anywhere from six months up to a year to get over the line, Woodward says the pace of deals would pick up as the transaction market intensifies. The Urban Developer Property and Economic Outlook | For property development professionals in the Greater Sydney region. Click here

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