COVID-19 and Commercial Property: Sydney’s investment market to stand test

Wednesday 20 May 2020

While the COVID-19 pandemic continues to yield impact on the global commercial property markets, Australia's prime investment market will remain relatively stable with only a modest expected pricing downturn, according to CI Australia.

This is a key observation in the commercial real estate firm's latest Office Market Update for Sydney CBD, which analyses the current market sectors and trends in light of the pandemic, throughout the fourth quarter of 2019 and into 2020.

The report states that while many Sydney CBD investment transactions will be paused until the economy re-opens, there is not sufficient evidence, at the time of writing, to suggest the investment market will suffer a permanent pricing downturn as a result. However, a 10 - 15 per cent reduction to the 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. Furthermore, the pricing differential between fully leased and vacant assets will widen a further 20% to reflect risk in these markets, the report states.

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 (CEO). "We anticipate that the Sydney CBD commercial property market, namely the investment sector, will experience varied however minimal volatility relative to the extreme movements observed in the share markets due to the COVID-19 pandemic. 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." Mr Hunter said.

The report outlines that the longer-term 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 echoed the sentiment of the report, adding that 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.”

The report observes that while the CBD leasing market has long been a standout of the industry - with demand having driven rents to record highs and prime vacancy down to just 2.7 per cent - this is where the impact of the pandemic is and will continue to be concentrated. "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." Mr Hunter said.

"Coupled with an almost 14 per cent 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," he concluded.

Positive activity within the CBD office leasing market is likely to gather pace once full economic activity is resumed, with the CBD to remain a coveted destination for national and international companies seeking a prestigious address with accessibility, transport and lifestyle amenities.

The full Office Market Update can be accessed here.


*The data quoted in the report is from both the Property Council of Australia (PCA) and CI Australia.

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