Office Prices to Peak in 2018
Australia’s strengthening economy, fueled by strong business conditions in the finance, business and property sectors, is expected to drive further demand for office space in Australia’s eastern seaboard states so as to support office-based employment growth. In Sydney’s office market, where supply has dwindled due to the unprecedented withdrawal of office space for redevelopment, refurbishment and public infrastructure construction, net face office rents have increased by 13 per cent annually over the past two years. However, research from Investa Property Group forecasts that in 2018, growth in prime office face rent will ease to 9-10 per cent in Sydney CBD, as supply enters the market to ease pressure on rent growth.
Figure 1: 12-Month Expectation of Capital Values of New South Wales’ Property sector (March Quarter 2018 Results) (Source: ANZ & Property Council of Australia/ PRP Research)
When we look at capitalisation rate across the Sydney market, transactions reaping strong sale figures across the CBD over 2017 have resulted in the pricing metric to be compressed to historical low levels. However, various property experts have noted strong cap rate compression experienced in Sydney and Melbourne’s prime CBD markets could reach the bottom of the cycle in 2018.
The global economy is forecasted strengthen as we head into 2018, with talks of interest rate increases across the major developed economies and strengthening government bonds yields, though it is forecasted that Australia will lag behind in implementing an expansionary monetary policy until at least the third quarter 2018. The prospect of a strengthening global economy, combined with strong rental growth is expected to drive growth in values heading into 2018. In saying this, Preston Rowe Paterson Research predicts there will be some minor cap rate compression to go as we enter 2018, justified by the availability of quality assets and opportunities within the Sydney CBD office market, though support the view that we are very close to the low point in the cycle. As we continue onto the New Year, Preston Rowe Paterson will continue monitor future sales transactions and the trajectory of the capitalisation rate in the near future.