CAROLYN CUMMINS June 09, 2012
Good space is tight … 75 Miller Street, North Sydney, offers a secondary yield of 9.3 per cent.
OVERSEAS investors continue to target the north shore office market, although the number of transactions has declined in the lead-up to the end of the financial year.
The impetus for the demand is a lack of new development, which has kept a base under rents in the past year.
It is a turnaround, albeit slowly, in sentiment for the north shore, which was one of the hardest-hit areas in the past few years.
The continued conversion of office towers into high-rise residential sites has contributed to the falling supply of leasing opportunities, according to agents.
In contrast, investors are scrambling to get a foothold in the market, which offers good amenities such as car parking and a range of office sizes, but with transport to both Sydney and Parramatta's central business districts.
The national director and head of capital transactions at Knight Frank, James Parry, said the interest in the area was due to the differential between prime and secondary yields, at 180 basis points at present.
''We expect the yield differential has plateaued,'' he said. ''It is unlikely that a return to the 60 basis point divide, which we saw in early 2008, will occur in the next five years. Current prime yields range between 7.25 per cent and 8 per cent with an average of 7.61 per cent, with Ark at Vodafone Place, 16-40 Mount Street, offering 7.3 per cent.''
Mr Parry said the current secondary yields were between 9 per cent and 10 per cent, with 116 Miller Street offering 9.2 per cent and 75 Miller Street at 9.3 per cent.
He said the current strength in occupancy and rental growth prospects coupled with yields at the bottom of the cycle indicated that stars were aligned for active buyers.
Mr Parry is also marketing 80 Mount Street, on behalf of Aspen Group.
In other deals, real estate analysts have suggested that a fund run by Abacus Property Group is looking to sell an office building at 50 Miller Street for more than $60 million.
Another group is said to be in due diligence on Investa's 146 Arthur Street. Charter Hall Direct Property Fund's 53 Berry Street has also attracted interest.
According to the managing director North Sydney at Knight Frank, Kymbal Dunne, interest in the area has been boosted by a decline in total vacancy levels to 7.2 per cent and a tight 1.9 per cent across the A-grade market.
This comes from the rising demand and falling supply and has put pressure on prime rent, growing 10.2 per cent in the past year to $587 a square metre.
''This phenomenon of strong increases to face rents before a reduction in incentives in leasing contract is one not seen before, but highlights the difficulty in financing in the current economic climate,'' Mr Dunne said.
''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.''
Mr Dunne added that given this change in the role of incentives in the market, the majority of rental growth was forecast to come from increased face rents.