Close to four years of yield compression has pushed Sydney’s CBD office yields to a historical, pre-GFC low – with potential to fall further, new research shows.
CBRE’s latest Market Flash highlights that Sydney CBD core prime office yields reached a nine-year low of 5.2% in Q3, while secondary yields are 20 basis points off their pre-GFC low of 5.9%.
CBRE’s Senior Director, Sydney CBD Office, Valuation & Advisory Services, Michael Pisano, said while the office sector was reflecting similarities with the market pre-GFC, there were key differences that suggest the current growth cycle could be maintained for longer.
“Capping off an impressive run in yield compression over the past three and a half years, Sydney CBD office yields have reached pre-GFC lows - without the same level of market rental growth to stimulate pricing when compared to the market in 2007,” Mr Pisano said.
“Evidencing this, the drivers of the current market are vastly different when compared to the previous cycle, which further suggests a greater degree of sustainability.”
In the current market, the sustained low interest rate environment has been the main driver of yield compression – compared to optimistic income growth assumptions.
CBRE Head of Research Stephen McNabb said the Reserve Bank’s approach to monetary policy had created an environment that was conducive to a healthy commercial property market.
“A long period of lower interest rates has been the key stimulus to the current cycle, however the next phase will be supported by lower vacancy rates and forecast rental growth,” Mr McNabb said.
“The other difference between now and the pre-GFC peak is that the fundamental outlook for the Sydney office market is looking solid. Vacancy - currently 5.6% - is expected to fall to 3.3% by 2018 and prime effective rent growth is running at a 23% annual rate in Q3 2016.”
He added: “Importantly this rent growth is following, not leading, the yield compression which is in stark contrast to the performance of the office market after the GFC.”
Mr Pisano said strong rent growth in Sydney could provide further scope for yield compression, however there was an absence of prime stock being put to the market at present.
“Importantly though, we will witness activity in the second half of 2016 in support of yield compression in the secondary market and the narrowing of the gap between prime and secondary yields,” Mr Pisano explained.
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CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (based on 2015 revenue). The Company has more than 70,000 employees (excluding affiliates), and serves real estate investors and occupiers through more than 400 offices (excluding affiliates) worldwide. CBRE offers a broad range of integrated services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at www.cbre.com.