Office values could fall by up to 15pc

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RISING vacancies and higher incentives imposed on the office market by the coronavirus could slash up to 15% off the value of Sydney CBD towers, which may not be recouped for five years.

However, Australia’s prime investment market will remain relatively stable, according to CI Australia’s latest Office Market Update, with only a modest pricing downturn expected.

While many Sydney CBD investment transactions will be paused until the economy re-opens, there is not sufficient evidence to suggest the investment market will suffer a permanent pricing downturn as a result.

However, a reduction of 10% to 15% to previous strong pricing metrics may be felt, due to the anticipated rise in office vacancy, increase in leasing incentives and the federal government’s deployment of tenant-favoured rental relief.

The gap in values of fully leased and vacant assets will widen a further 20% to reflect risk in these markets.

Pricing for strategic development acquisitions are remaining strong and buildings with well-leased, longer-term weighted average lease expiries will continue to maintain their value well, said Andrew Hunter, CI’s chief executive officer.

“However, office assets with significant portions of retail space are likely to see cash flow be heavily impacted due to the COVID restrictions and social distancing requirements in place. Those with dedicated space related to tourism and travel, education, hotels, restaurants and co-working office space will also see cash flow impacted,” Hunter said.

The post-COVID-19 pricing environment is likely to correct itself in three to five years and return to the levels witnessed in the peak of 2019.

CI’s head of Asia desk, Shirley Fan said Sydney’s position as a global investment destination will assist in the recovery.

“Sydney has proven to be a safe and attractive investment option for cross-border buyers globally, with an excellent track record of being a stable, transparent and liquid market with little to no political risk,” she said.

“Despite the drop in investment volumes throughout the first quarter of 2020, the CBD’s quality assets and healthy investment environment will help minimise any potential long-term impacts of COVID-19.”

Sydney’s CBD finished 2019 as the top destination for cross border activity within the Asia Pacific region. Numbers from Real Capital Analytics this week showed the volume of commercial property transactions tumbled by 47% across Australia to $2.16 billion in the March quarter, year on year, while the number of deals fell by a similar measure. This was punctuated by the collapse of a $950 million sale of the 39 Martin Pl tower from Macquarie to ISPT.

Commercial property transactions across the Asia Pacific dropped 56% in the quarter.

Leasing hit hardest

The pandemic is and will be concentrated on the CBD leasing market, according to the report, which has seen demand drive rents to record highs and prime vacancy forced down to a low of 2.7%.

Hunter said countless leasing decisions have been impacted by tenant uncertainty.

“The industry will possibly face further impacts too, if and when some tenants revise their office space needs due to an increase in permanent remote working arrangements, however balanced by social distancing measures,” Hunter said.

“Coupled with an almost 14% increase in supply set to come online in the medium term and the ongoing decentralisation in the more affordable fringe and metropolitan markets, means we expect vacancy rates to rise to levels near historical averages, and hence bring effective rents down.”

Sydney CBD experienced another period of an undersupplied market was spurred by a three-year trend of continual negative net supply. Some 522,168 sqm of stock was withdrawn permanently for the construction of the Sydney Metro and residential conversions in recent years, and tenants have given more consideration to neighbouring office markets such as North Sydney, as well as Parramatta.

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