Easier access to finance, a fresh injection of offshore capital and new infrastructure projects are some of the predictions that should see Sydney’s commercial property market continue to grow strongly well into 2020, according to agents and property bosses.
They are an extension of the trends of 2019, with many agents pointing to the perceived political stability resulting from the May federal election result and recent events in Hong Kong as turning points for the commercial market.
Across all sectors, offshore capital is set to spur demand in the new year – a combination of favourable exchange rates and political stability – despite record low yields in the office and industrial sectors.
“Australia will continue to attract foreign capital supported by a cheap Australian dollar, positive yield spreads to debt enabling positive funding from leverage and the lag effect of cap rate compression due to some scepticism of further runs in yield as we hit all-time yield lows and highs in valuation,” predicted Paul Craig, chief executive of Savills Australia and New Zealand.
Increased interest from investors in Hong Kong – roiled by months of democracy protests – had become apparent in the Sydney fringe market towards the tail end of 2019, said Miron Solomons of Colliers International, with infrastructure projects helping to sweeten the deal.
“The ‘build it and they will come’ mindset exists in the city fringe, with the first signs of the completion date for the Sydney Light Rail having spurred significantly strong interest most notably from Hong Kong given “safe harbour” perception of direct investment in Australia,” said Mr Solomons, adding that this was set to continue in the new year with no sign of an end to Hong Kong’s instability.
It’s a sentiment backed by Ben Azar, national head of cross-border investments, capital transactions at Savills Australia.
“In light of recent reductions in debt costs, Australia is enjoying some of the largest spreads globally, which is capturing the attention of institutional global investors. This is coupled with an accelerated urgency from Hong Kong capital seeking quality assets in Australia, meaning there will be no shortage of capital in 2020 trying to find a home in the Australian market,” Mr Azar said.
Andy Hu, joint state head, Asia markets at Savills Australia, said that most foreign capital would be directed towards the office sector, although retail would likely get a look in.
“The majority of the capital is looking for CBD office assets with future redevelopment upside,” he said. “Retail assets are also seen as a status symbol and an asset class that is well known and well respected across the Asia-Pacific region, if not the world.”
Savills tipped offices in Sydney, North Sydney and Parramatta as their “preferred asset class” in 2020, followed by industrial and logistics assets in western Sydney.
Infrastructure announcements to drive speculative investment
Other than the light rail, which commenced operations in early December, the recent announcement of a revitalisation of Sydney’s central precinct would also drive speculative investment activity in 2020, according to Colliers International’s Matt Pontey, who labelled the precinct as a potential “next Barangaroo”.
“2020 will see the central planning strategy becoming a key focus of further investment in the city fringe. The central planning strategy will further enhance and revitalise Sydney and in particular the city fringe,” Mr Pontey said.
“The Central Station precinct will undoubtedly be the largest benefactor of this plan coupled with the announcement of Atlassian’s plans to build a high-tech precinct over the rail yards. This will create increasing demand for nearby assets from investors banking on further future capital growth and developers seeking to strategically place themselves to benefit from even further investment from the NSW state government in what has the potential to be an absolute game-changing project for Sydney and the next Barangaroo.”
Finance creating demand, limited supply
Other than cashed-up overseas investors, an easing of lending restrictions in 2019, particularly for owner-occupiers, combined with low interest rates, will continue to change the dynamics in the property market in 2020.
Sydney agent Tim Noonan, of Noonan Properties, recently predicted that this trend would be witnessed across different price points in the new year.
“With interest rates continuing to be at record low levels and the possibility of stooping lower, we forecast a further influx of owner-occupiers switching rent repayments for mortgages in the Sydney CBD commercial strata market,” wrote Mr Noonan in a 2020 market forecast focused on the strata property market.
“The most prolific buyers are expected to be from the legal, financial and accounting industries.
“However, the growth of local technology and IT companies has delivered a significant increase in property acquisitions for the industry in 2019.
“More properties are expected to become available for sale as vendors look to capitalise on sizzling hot sale prices, which will open up new opportunities for business owners needing to occupy and grow their operations while paying off their mortgage on low interest rates.”
Long-term property holders were likely to cash-in on the demand created by this low-rate environment in the new year, signalling a generational changing of the guard in some of Sydney’s most prestigious suburbs.
“[For example], the eastern suburbs ownership is traditionally made up of private families who generally hold these assets for decades. There is now a generational shift that is seeing families divesting, and the next wave of new capital is set to enter this market and seek to refurbish and reposition these assets,” said Collier’s Nick Lumley.
Despite this, the anticipated level of demand is unlikely to be met by existing commercial stock, leading to predictions that a wave of recent residential-to-commercial site conversions will continue.
“We have recently witnessed this in Double Bay, with Fortis Development Group electing to take a DA-approved residential development and converting it to commercial office space in order to address the significant underlying demand that exists. We expect this shift to continue and assets to be repositioned to take advantage of the demand that remains unaddressed,” Mr Lumley said.
Tight supply to put pressure on alternative asset classes
The hunt for better returns than term deposits and bonds, as well as tight supply in key commercial markets, is likely to increase focus on the nascent build-to-rent and co-living sector in 2020, according to Mr Solomons.
“The quest for the holy grail of investment continues unabated, albeit slower in NSW than Victoria. Build-to-rent is on everyone’s mind as they seek to establish this growing asset class; the first strong mover has been the co-living sector, with operators such as UKO and Hmlet making significant inroads to changing the attitude of Australians to this new asset class that addresses the undersupply of quality flexible residential accommodation,” Mr Solomons said.
“Challenges exist for establishing true build-to-rent in NSW, which would notably require further support from the NSW government. However, with large groups such as Mirvac, GIC, Brookfield and Blackstone all having invested in the asset class, there’s a strong likelihood that as the product progresses, it will be adopted by the wider market.”
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