Office strata assets are moving back into the spotlight as investors prefer to buy rather than pay high city rents.
As vacancy levels continue to maintain a low rate across the broader Sydney CBD market, rents remain expensive, which has seen more occupiers looking to shelter from further increases.
Demand remains strong from small to medium business with the owners taking the plunge to be the occupiers.
There is a limited supply of strata offices in the city as developers snapped up many sites with the intention of converting them to residential. But as office leasing demand is high, the landlords are retaining the sites and reaping the high office rents.
The lack of supply has been triggered by the new strata regulations in NSW, where a site can be sold if 75 per cent of occupants are in agreement.
Developers are moving in and adjoining the sites for future development.
Tom O’Neill, manager of investment services at Colliers International, said the shortage of available stock has seen investors’ focus shift from freehold to chasing strata investments with long weighted average lease expirees (WALEs).
“Frustrated high net worth investors including private syndicates and family property funds have now reverted to strata property as a more attractive alternative investment to place capital,” Mr O’Neill said.
Since 2017 there has only been eight freehold investment transactions sold between $5 million to $20 million within the CBD totalling $77.4 million, according to Ray White commercial’s head of research, Vanessa Rader.
“Limited supply available for sale has also increased competition and been instrumental in growing capital values into 2018 after standout increases in 2016 and 2017,” Ms Rader said.
“The 2018 calendar year has seen $151.93 million worth of assets change hands across 100 transactions bringing the average sale price to over $1.5 million for the first time in history.”
Mr O’Neill and Harry Bui of Colliers International are currently marketing Part Level 14, 85-91 Liverpool Street, Sydney. The rooftop strata property occupies 1451 square metres including a large terrace area and has a long lease with the World Tower Childcare centre.
Mr O’Neill said level 14 is one of only a few strata properties with child occupation certification within the CBD.
He expects the long lease contract is attractive for investors in freehold properties of similar of dollar value within the CBD.
Tim Noonan of Noonan Commercial last week sold the penthouse at Culwala Chambers at 67 Castlereagh Street to the Australian Hotels Association for $5.9 million or about $16,666 per square metre. He is marketing Suite 2/185-187 Gloucester Street on behalf of Orca Property with a value above $4 million.
“The logic for business owners to purchase their own commercial strata office is strong,” Mr Noonan said.
“With record high rents and record low interest rates, the cost benefit of owning and occupying rather than renting has never made more sense. For investors also the combination of rising rents, low vacancy and low interest rates makes commercial strata a compelling investment.”
Other retail strata sales include Lot 1, 507-509 Kent Street, Sydney, leased to outdoor adventure store Paddy Pallin with a 9.67-year WALE, which sold for $9.5 million.
The retail sites at 1&2, 131 Macquarie Street leased to Contrabando Restaurant were sold with a 7.62 year WALE in place, for $10.5 million on a 4.49 per cent yield.
Another recent sale is the ground floor of 16 O’Connell Street, Sydney, leased to The Carter bar with a 9.92 year WALE, which sold for $6 million on a 5.19 per cent yield. All properties were sold to private investors.
On a larger scale, Spanish company Allegra has recently sold the retail component of 64-68 Castlereagh Street leased to BVLGARI on a 10 plus 10 year lease. The property sold for $50 million on a 5.56 per cent yield to Deka, from Germany.