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Sydney office sector set to rise: CBRE
Released 21 July 2011

Owners of prime office property in the Sydney CBD can expect a “super boost” to returns over the next 12 to 18 months, with CB Richard Ellis forecasting total returns to top 20% in 2012 as both incentives offered by landlords decline and rents start to rise.    

Speaking at the firm’s annual Sydney Market Outlook breakfast yesterday (20 July 2011), CBRE Executive Director Global Research and Consulting Kevin Stanley said the property market had endured a “fitful recovery” and this was expected to continue as business confidence waxed and waned in the future.

However, with the city’s prime office vacancy rate expected to be as low as 6% by the end of the year, Stanley said the Sydney office market recovery was finally gathering pace with face rents forecast to increase by 10-12% in 2012.

“While there is some scope for a slight compression in investment yields, income growth will be the key value driver in this recovery,” Stanley said.

“It has taken longer than we may have initially expected, but prime rents are increasing and incentives are starting to move down and this combined will provided a super boost to returns over the next 12 to 18 months.”

A more modest total return of 10-13% has been forecast for the industrial sector, where leasing demand has improved and property construction activity has resumed with a clear focus on the arc stretching from Port Botany through the M5 corridor and to the outer west.

In regard to the retail market Stanley said the sector was facing its biggest challenge in 20 years.

Consumers were saving, not spending. Household confidence was low as a result of the carbon tax, high living costs, interest rates and house prices. Although still small compared to the total retail sector, on-line retailing was also growing fast with no end in sight. And Australian retail occupancy costs had now been rising for almost 20 years, with Sydney retail rents among the highest in the world.

Stanley also noted that the Australian retail market was missing the “wow” factor - which was all important in encouraging consumers to spend.

“We’ve seen offshore retailers like Costco, Apple and Zara come into this market and be very successful despite the macroeconomic conditions not being conducive to high retail spending,” Stanley said.

He noted there was still significant potential for more global retailers to come into the Sydney market, which was currently running second to Melbourne in regard to the representation of global retailers.

“Sydney has suffered from an overall low and falling ranking in global retailer representation by world standards. An increase in global retailer numbers would help fill the higher-than-usual vacancy in the retail sector, sustain the current high rentals and help bring the wow factor back into the retail sector.”