Sydney On Top Of World Office Yield Spectrum

Sydney has been revealed to offer the most attractive office investment yields according to a list of the world’s gateway office investment destinations developed by Savills and Deakin University.

Sydney’s yields sit at 5.62 per cent, with LA West, and San Francisco the only other gateway cities offering above 4.50 per cent as world yields continue to tumble.

The data has come from the World Office Yield Spectrum, which compares 54 cities across, Asia, Europe, the United States and Australia, and reports investment value for office property as investors scour global cities for the most attractive yields in the most secure markets.

Savills National Head of Research in Australia and report editor Tony Crabb said property yields have continued to firm but bond yields are falling faster and, in that context, investors are viewing risk premiums of between 2 and 3 per cent in most office investment markets as fair value.

The report found yields had firmed by an average 32 basis points across the 11 gateway cities since December 2014 with both Munich and Tokyo’s yield falling 55 basis points, Hong Kong 40 basis points and Sydney a whopping 100 basis points. Singapore, at 4.00 per cent, saw yields soften 15 basis points in response to slower economic conditions.

Of the 54 cities, London’s West End, at 2.82 per cent, was the only other city to record a sub 3 per cent yield with Hong Kong, while Ho Chi Minh City (9.36 per cent) and Hanoi (9.00 per cent) offered the highest yield, however those yields reflected a perception of greater investment risk.

Mr Crabb said with some level of economic uncertainty remaining in most markets globally it’s fair to say that office risk premiums would continue to offer better value and hence drive greater demand and even firmer office yields.

"Much of what happens in 2017 and beyond will depend on the course the US Federal Reserve takes with regards to interest rates.

"The movements in US interest rates will determine how currencies behave, how trade flows and how capital moves around the world," Mr Crabb said.

He said the outlook for office yields was likely to be one of further compression particularly in gateway cities like Sydney where strengthening fundamentals were beginning to drive rental growth.

"Firming yields in many instances could be viewed as counter-intuitive as soft leasing markets have resulted in very high incentives and correspondingly low net rents.

"So any growth in net effective rents, and thus returns, is certainly going to drive even greater demand for office property and ultimately firmer yields,’' he said.