- North Sydney has been the stand out performer of all the North Shore markets over the past 12 months. A combination of strong absorption levels and limited supply has resulted in total vacancy levels contracting to 7.2 per cent and a tight 1.9 per cent across the A Grade market. This has put pressure on prime Net Face Rents; growing 10.2 per cent over the last year to $587/sqm.
- This low vacancy environment is expected to remain given the limited supply pipeline, this has had a beneficial effect on net face rents with growth recorded of 10.2 per cent over the past 12 months.
- Tenant demand has been strong over the past six months across all quality grades. As space options diminish for A Grade stock, tenants have been forced to consider secondary space.
- Double digit Prime Net Face Rent growth has resulted in incentives (gross) starting to experience some downward pressure and have now moderated to 25 per cent from the 27.5 per cent recorded in April 2011.
According to Kymbal Dunne, Knight Frank’s Managing Director North Sydney, these high incentives are only expected to slightly moderate due to capital funding constraints; tenants are looking for greater incentives to provide fit outs and are willing to pay a higher face rent for this type of product.
“This phenomenon of strong increases to face rents before a reduction in incentive is one unseen before, however highlights the difficulty in financing in the current economic climate".
“The demand for high quality space is constant, but with a market where 75 per cent of the stock is B and C grade, there is no foreseeable new stock. The refurbishment opportunity has become the elephant in the room” he continued. The tightness of the prime market and benign outlook for new supply is expected to underpin a continuation of the rental growth albeit at a lesser rate due to weak white collar employment projections.
Mr Dunne also said given this change in role of incentives in the market, the majority of rental growth is forecast to come from increased face rents, with prime net face rents forecast to generate average growth of 4.9 per cent per annum over the next two years. There has been little transactional activity in the North Sydney market this year.
According to James Parry, Knight Frank’s National Director, & Head of Capital Transactions, the differential between prime and secondary yields is currently at 180 basis points.
“We expect the yield differential has plateaued. It is unlikely that a return to the 60 basis points divide which we saw in early 2008 will return in the next five years.
Current prime yields range between 7.25 per cent and 8.00 per cent with an average of 7.61 per cent; e.g. Ark at Vodafone Place, 16-40 Mount Street is 7.3 per cent. Current secondary yields are between 9-10 per cent e.g. 116 Miller Street is 9.2 per cent and 75 Miller Street is 9.3 per cent.
“The current strength in occupancy and rental growth prospects coupled with yields at the bottom of the cycle indicates that the stars are aligned for active buyers.
“North Sydney is a location of investment appeal. With limited prime supply currently, assets with value add or refurbishment potential to A Grade quality will show increased value given the scope for further yield contraction” he continued.
For further information, please contact:
Kymbal Dunne, Managing Director North Sydney, 0419 992 068
James Parry, National Director, & Head of Capital Transactions – NSW, 0408 553 000
Jessica Freeman, National PR & Communications Manager, 02 9036, 6794, 0411 354 307
Notes to Editors
Knight Frank LLP is the leading independent global property consultancy. Headquartered in London, Knight Frank and its New York-based global partner, Newmark Knight Frank, operate from 245 offices, in 47 countries, across six continents. More than 7,067 professionals handle in excess of US$816 billion worth of commercial, agricultural and residential real estate annually, advising clients ranging from individual owners and buyers to major developers, investors and corporate tenants. For further information about the Company, please visit www.knightfrank.com