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Sydney Office Market Overview

Australia Research | December 2020

REPORT

Savills Research


Foreign exchange

ɋ AUD is currently experiencing a recovery following sharp risk-off sentiment during the Covid-19 pandemic.

ɋ Reaching lows of $0.55, we are now seeing the AUD buy $0.75 USD.

Australian Economic Overview

Cash Rate / Futures Curve

ɋ The RBA has reduced the official cash rate to an all time low of 0.10% in a bid to support the Covid-19 recovery. Futures markets are indicating further rate cuts may be ahead.

ɋ A reduced cash rate will help the AUD lower, increase Australia’s global competitiveness, drive business investment and support the housing market which is seen as critical for GDP growth.

Dec 1

5De

c 16

Dec 1

7De

c 18

Dec 1

9De

c 20

0.40

0.80

1.20 AUD/USD AUD/EUR AUD/GBP AUD/SGD AUD/NZD

Source: RBA

Bond Yields

ɋ Bond yields globally have reached all-time lows following major monetary policy moves to cut interest rates and implement quantitative easing programs.

ɋ Government and RBA stimulus has flushed markets with liquidity to ensure borrowing costs and access to funds remain accommodative.

ɋ The RBA has engaged in yield curve control by buying bonds out to 3 years in the secondary market to keep bond yields suppressed.

Oct 1

0Oc

t 11

Oct 1

2Oc

t 13

Oct 1

4Oc

t 15

Oct 1

6Oc

t 17

Oct 1

8Oc

t 19

Oct 2

00.0%

2.0%

4.0%

6.0%

Govt. Bond Yield - 2yr Govt. Bond Yield - 3yrGovt. Bond Yield - 5yr Govt. Bond Yield - 10yrCash Rate

Source: RBA

Dec 2

1De

c 20

Jan 21

Feb 2

1

Mar 2

1Ap

r 21

May 2

1Jun

21Jul

21Au

g 21

Sep 2

1Oc

t 21

Nov 2

10.00%

0.05%

0.10%

0.15%

Implied Futures Rate Current Cash Rate

Source: RBA

2savills.com.au/research 2

3


Business Conditions & Consumer Sentiment

ɋ Modest improvements in Business conditions and consumer sentiment were evident over the last month driven by falls in case numbers and the end of Melbourne’s lockdown.

ɋ Following the publication of promising vaccine trial results from Pfizer the Australian stock market surged by 2.2%, signaling a tight correlation between a vaccine and positive consumer sentiment.

Credit Spreads

ɋ Credit spreads have normalised following a sharp increase in March/April.

ɋ Access to funding is improving as Covid cases have been managed well, enabling the economic recovery.

ɋ Caution still remains in providers of credit, however debt costs at all time lows further enhances returns to investors.

GDP Growth: The Australian economy grew by 3.3% in the September quarter (seasonally adjusted) marking the beginning of economic recovery from the Pandemic. Australia’s economy is set to grow by 5% in 2021 and 4% in 2022 according to the RBA.

Interest Rate: All time low base rates combined with low cost of funding for banks has resulted in total cost of debt for core office well below 2.00%. Three and five year base rates remain low at 0.16% and 0.38% respectively.

Unemployment: Unemployment was recorded at 7.0% in October (down from 7.5% in July), with projections for 2021 revised downwards across the board.

Inflation: Inflation is expected to remain subdued in 2021 and 2022 with annual figures in the 1.5% to 2% range as the economy recovers from COVID. Following this, with interest rates at all time lows and the RBA recently commencing its $100b quantitative easing program we may see inflation notch into the 2-3% target range, provided GDP growth is strong.

Exports/Imports: Global trade is currently volatile and severely affected by Covid-19. Geopolitical tensions are rising, particularly trade associated with China, and global demand has fallen significantly. Australian exports reached a 3 year low in August of $32b, down from ~ $41b/month in 4Q 2019. Imports reached a 7 year low in May of $27.5b, down from ~ $36b/month in 4Q 2019.

0

100

200

300

400

500

600

700

800

A BBB

Sep 0

5Se

p 06

Sep 0

7Se

p 08

Sep 0

9Se

p 10

Sep 1

1Se

p 12

Sep 1

3Se

p 14

Sep 1

5Se

p 16

Sep 1

7Se

p 18

Sep 1

9Se

p 20

Source: RBA

-60

-40

-20

0

20

40

60

80

100

120

140Consumer Sen�ment Business Condi�ons

Sep 1

0Se

p 11

Sep 1

2Se

p 13

Sep 1

4Se

p 15

Sep 1

6Se

p 17

Sep 1

8Se

p 19

Sep 2

0

Source: RBA/Westpac/NAB

33


Investment Market – Sydney CBDBond to Office yield

ɋ Office and bond yields have been falling, with the pace of bond yields outpacing office yields.

ɋ Subsequently the yield spread between bonds and office has increased, creating an attractive proposition for office investors and potential for further cap rate compression.

ɋ The A-Grade yield spread peaked in March 2020 at 3.84, the largest spread since 2015.

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

Sydney CBD 10yr Bond

Sep 1

0Se

p 11

Sep 1

2Se

p 13

Sep 1

4Se

p 15

Sep 1

6Se

p 17

Sep 1

8Se

p 19

Sep 2

0

Source: Savills Research/RBA

Average A Grade Yield & Capital Value

ɋ Capital values growth in Sydney CBD has been relatively flat over the last 18 months.

ɋ Assets due to sell over the remainder of the year will test capital values and set the benchmark, following falls in income returns falling as a result of the pandemic.

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

0

$5,000

$10,000

$15,000

$20,000

$25,000Capital Value - AverageMarket Yield Avg (RHS)

Sep 1

0Se

p 11

Sep 1

2Se

p 13

Sep 1

4Se

p 15

Sep 1

6Se

p 17

Sep 1

8Se

p 19

Sep 2

0

Source: Savills Research

Average IRRs

ɋ Over the last 12 months we have seen IRRs in Premium and A Grade assets record falls of 20 and 5 basis points respectively.

ɋ With increased incentives impacting effective rents we anticipate that these will continue to contract until effective rental growth is seen.

Sep 1

0Se

p 11

Sep 1

2Se

p 13

Sep 1

4Se

p 15

Sep 1

6Se

p 17

Sep 1

8Se

p 19

Sep 2

0 5.00

5.50

6.00

6.50

7.00

7.50

8.00

8.50

9.00

9.50

10.00 Premium Grade A Grade B


0% 20% 40% 60% 80% 100%

Purchasers

Vendors

Fund Trust DeveloperOwner Occupier Government SyndicateForeign Investor Private Investor Other


Sales Volumes:

ɋ Anecdotal evidence suggests that demand for office assets in Sydney CBD remained strong throughout 2020 with foreign and domestic investors alike.

ɋ The COVID-19 pandemic stalled the investment market in early 2020 with the majority of pending sales not proceeding and other properties not being brought to the market as expected.

ɋ As confidence improves, sales volumes have increased in Q4 2020, with several assets coming to the market in November/December

Sep 1

0Se

p 11

Sep 1

2Se

p 13

Sep 1

4Se

p 15

Sep 1

6Se

p 17

Sep 1

8Se

p 19

Sep 2

0$0m

$1,000m

$2,000m

$3,000m

$4,000m

$5,000m

$6,000m

$7,000m

$8,000m

$9,000m Core Southern

Midtown Western Corridor

Walsh Bay - The Rocks


Sydney CBD Sales Volumes ($5m+)

Average Annual Change

12mo. Trend*

Capital Value ($/sqm) 19,800 -2.5%

Yield (%) 4.7% -5bps

IRR (%) 6.4% -10bps

Total Debt Cost (%) 1.62% -87bps

*Forecast trend over next 12 months



5


Top Recent Transactions:

Property Date Vendor | Purchaser Price ($m) | Interest (%) $/Sq mInitial Yield

Market Yield

WALE (by income)

Occupancy

Sydney

Grosvenor Place, Sydney

Nov-2020 Dexus | CIC $925 | 50% $21,921 5.00% 5.15% 3.20 years 89%

45 Clarence Street, Sydney

June-2020 Dexus | Zone Q $530 | 100% $16,511 5.10% 5.00% 3.30 years 100%

100 Market Street, Sydney

Dec-2019 Blackstone | Link REIT$683 | 100% Leasehold

$24,062 3.94% 4.20% 8.99 years 100%

Liberty Place, Sydney

Oct-2019Ivanhoe Cambridge & Blackstone | ISPT

$400 | 25% $26,903 4.10% 4.30% 8.60 years 99%

6 O’Connell Street, Sydney

Oct-2019 Investa | New Pointe $315 | 100% $19,580 4.60% 5.14% 2.85 years 95%

135 King Street, Sydney

Aug-2019 Stockland | Investa $335 | 50% $20,567 4.11% 4.96% 2.68 years 96%

Chifley Tower, Sydney

Aug-2019GIC | Charter Hall & Deep Value Property

$922 | 50% $26,766 4.06% 4.67% 4.30 years 98%

Darling Park Tower 1 & 2, Sydney

Aug-2019 Brookfield | GPT $531 | 25% $19,141 5.30%T1 – 5.05%T2 – 5.02%

5.60 years 99%

Brookfield Place Development, Sydney

Aug-2019 Brookfield | AMP $450 | 25% $23,873 5.00% 4.75% - 65%

Piccadilly Complex, Sydney

Aug-2019Oxford Investa | Stockland

$347 | 50% Leasehold

$14,649 5.32% 5.55% 2.40 years 95%

North Sydney

60 Miller Street, North Sydney

Nov-2020 Dexus | Huge Linkage $273 | 100% $14,109 5.02% 5.25% 3.04 years 96%

100 Walker Street, North Sydney

Jan-2020N E Christie | Pro Invest

$167 | 100% $15,434 5.00% 4.96% 5.95 years 100%

2 Elizabeth Plaza, North Sydney

Nov-2019 Blackrock | SC Capital $127 | 100% $16,752 4.92% 5.17% 4.00 years 100%

20 Berry Street, North Sydney

Nov-2019 Private | Private $114 | 100% $12,618 5.04% 4.99% 3.17 years 100%

99 Walker Street, North Sydney

Nov-2019Oxford Investa | Abacus

$311 | 100% $16,066 5.00% 4.95% 5.78 years 98%

118 Mount Street, North Sydney

Oct-2019Zurich | Union Investment Group

$353 | 100% $17,207 2.84% 5.44% 10.0 years 80%

107 Mount Street, North Sydney

Sep-2019 BNT Property | Private $115 | 100% $17,589 3.99% 4.33% 2.03 years 100%

111 Pacific Highway, North Sydney

Jul-2019Oxford Investa | Mapletree

$273 | 100% $14,624 5.16% 5.00% 1.99 years 95%

55


Leasing MarketDevelopment:

ɋ The development stock completing between 2021-2024 has 141,854sqm of available space which is only approximately 2.8% of total Sydney stock.

ɋ Following completion of current developments, such as Quay Quarter Tower and Salesforce Tower, development focus will centre on the Metro Stations at Martin Place and Pitt Street.

(100,000)sq m

(50,000)sq m

-

50,000sq m

100,000sq m

150,000sq m

200,000sq m

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Historic Net Addi�onsSavills Forecast15yr Avg

Source: Savills Research/PCA

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

183-

185

Clar

ence

St

10 C

arrin

gton

St

275

Geor

ge S

t

210

Geor

ge S

t

50 B

ridge

St

180

Geor

ge S

t

Sydn

ey M

etro

- No

rth

Tow

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Sydn

ey M

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- So

uth

Tow

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Pi�

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(252

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65-7

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arke

t St

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iller

s Poi

nt

55 P

i� S

t

8-10

Lee

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33 B

ligh

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inde

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201

Suss

ex S

t

Lee

Stre

et

133

Cast

lere

agh

St

2021 2022 2024 2025 2027 2028

Commi�ed NLA Available NLA Requires Pre-Commitment

Development Pipeline


7


Demand

In the month of November there were 28,000sq m of active public requirements controlled by tenant representatives in the market seeking CBD premises. This figure was up from 14,000sq m in September and 16,000sq m in October. On top of this cohort of tenants there are those tenants that are non-represented, those tenants are also actively returning the market.

The small and medium enterprises market (SME) is largely driving this overall activity as they look to capture the deals available and at the same time reconnect their staff with one another allowing these groups to drive culture and productivity.

0

50,000sq m

100,000sq m

150,000sq m

200,000sq m

250,000sq m

300,000sq m

350,000sq m

In 6 Mths 6 -12 Mths 1 - 2 Yrs > 2 Years

Premium (sq m) A Grade (sq m)

Nov 1

9Fe

b 20

May 2

0

Aug 2

0No

v 20

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

200,000

250,000

300,000

350,000

400,000

450,000

500,000

550,000

600,000Availability sq m (LHS) Availability % (RHS)

Full Floor AvailabilityThe Savills Prime Full Floor Availability Report assesses the state of the leasing market in a different manner to standard vacancy surveys. The report shows each Premium and A Grade building in the city on a floor-by-floor basis highlighting which floors are available for lease, now and in the near future, including those under construction and refurbishment.

Over the last 12 months the amount of available full floors has increased to a total of 461 floors currently available (as at October 2020). In October 2019, there were 288 full floors (369,524 square metres) available with this increase in full floors mainly attributed to new developments, sublease and backfill space.

Flight to QualityTenants are taking advantage of the

deals available in higher grade properties such as typical A Grade

tenants jumping upto premium grade.

Future DemandThe SME market will drive the

recovery however as the larger corporates such as the banks, tech firms & accounting firms implement

their return to work strategies this will set the tone for the coming years.

Fit Outs are Critical95% of all leasing deals upto

3,000sqm in 2020 have occurred where there has been a second hand

or new fit out already in place.

Sydney CBD: A Grade Metrics as at September 2020

Average Annual Change

12mo. Trend*

Net Face ($/sq m) 1,100 -1.3%

Net Effective ($/sq m) 680 -23.2%

Incentive (Gross %) 32.5 4.8%


77


Property | Grade Tenant | Area (sqm) Rent | Term (yr) | LCD

161 Castlereagh Street | P Blackwattle | 3,200 $1,465 (N) | 2.5 | Jan-21

400 George Street | A Resolution Life | 3,500 $920 (N) | 5| Mar-21

60 Martin Place | P Fidelity | 1,000 $1,712 (G) | 7 | Mar-20

55 Harrington Street Acciona |1,500 $940 (G) | 3| Aug- 20

1 Macquarie Place | P FTI | 1,205 $1,375 (N) | 7 | Jan-21

35 Clarence Street | A Sedgwick Australia | 1,111 $950 (N) | 5 | Feb-21

9 Hunter Street | B Smartsheet | 951 $1,200 (G) 3 | May-21

9 Castlereagh Street | A Accolade Wines | 774 $1,281 (G) | 5 | Jul-21

Top Recent Transactions:


9


Savills plcSavills is a leading global real estate service provider listed on the London Stock Exchange. The company established in 1855, has a rich heritage with unrivalled growth. It is a company that leads rather than follows, and now has over 600 offices and associates throughout the Americas, Europe, Asia Pacific, Africa and the Middle East. This report is for general informative purposes only. It may not be published, reproduced or quoted in part or in whole, nor may it be used as a basis for any contract, prospectus, agreement or other document without prior consent. Whilst every effort has been made to ensure its accuracy, Savills accepts no liability whatsoever for any direct or consequential loss arising from its use. The content is strictly copyright and reproduction of the whole or part of it in any form is prohibited without written permission from Savills Research.

Andrew Cottam DIRECTORCapital Advisory+61 (0) 416 049 [email protected]

Tom Mott STATE DIRECTOR NSW Office Leasing+61 (0) 400 259 [email protected]

Ben Azar STATE DIRECTOR - NSW Capital Transactions+61 (0) 2 8215 [email protected]

Paul Craig CEO AUSTRALIA & NEW ZEALAND+61 (0) 2 8215 [email protected]

Please contact us for further information

Savills team

99
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