NSW 2020 property market outlook: Savills
NSW 2020 property market outlook: Savills
3 January 2020
Savills recently provided a 2020 property market outlook for each state in Australia. Here’s a summary of predictions for NSW.
Capital markets
According to Ian Hetherington, National Head, Capital Transactions at Savills Australia, 2019 was the year that we fully accepted lower for longer. And it will be the same in 2020.
“2020 will see further yield compression off the back of low interest rates, shrinking margins as it becomes more competitive between the banks and low vacancies driving rental growth.
“Demand from offshore investors will dominate the market due to the low AUD, geopolitical security and their ability to use leverage at levels double that of domestic investors,” he said.
According to Ben Azar, National Head of Cross Border Investments, Capital Transactions at Savills Australia, in 2020, Australia and particularly Sydney and Melbourne will see increased demand from offshore investors, predominantly from Singapore and Hong Kong.
“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,” he said.
Retail
According to Steven Lerche, National Director, Retail Investments at Savills Australia, retail transaction activity came to a standstill at the beginning of 2019 with both institutional and corporate groups reluctant to sell. “This momentum didn’t really change during the year and deal flow could remain sluggish in 2020.”
“Many larger assets put up for sale failed to transact due to disruption in the retail industry, noise from overseas and fewer buyers in the market. Contrary to this, the smaller end of the market, freestanding retail investments and neighbourhood shopping centre sectors have been in high demand, fuelled by the low interest rate environment.
“Coles and Woolworths freehold disposal programme has kept the smaller end of the market strong with tight yields remaining the norm.”
Mr Lerche believes deal flow in 2020 is likely to come from funds looking to dispose of non-core assets and it will be the small fund managers and privates that remain active on the buy side.
Industrial and logistics
According to Michael Fenton, National Head, Industrial and Logistics at Savills Australia, 2019 was characterised by the dichotomy created by the vast amount of capital scouring the Australian industrial and logistics market for a broad spectrum of investment opportunities, to the diminishing demand and reduced take up of new supply in most of the major tier markets.
“The former trend has seen an unprecedented record achieved for core capitalisation rates, while the combined lack of opportunities has seen the spread between core and secondary rates compress to 100 basis points, or less in some instances.
“The relative lack of stabilised product has sent many institutions in search of large tracts of land to develop their own product, which has been a dominant theme in major eastern seaboard markets, particularly Sydney. The recent boom in infrastructure investment in NSW has been a catalyst for this, with transport infrastructure projects creating the need for new land releases, which have been snapped up by the major institutions.
“The prediction for 2020 is more of the same, for the first half of the year at least, with no foreseeable catalyst to change the current dynamic,” he said.
Metro and regional sales
Strong activity throughout NSW has proven that investment stock is still considered hot property for well leased retail/commercial properties, including single tenant properties through to properties with multiple tenancies and well located properties.
According to Nick Lower, Director, Metropolitan & Regional Sales at Savills Australia, “With interest rates now at historic lows, we are continuing to see strong sales results being achieved along with solid yields across most inner city locations within Sydney. For example, 62-64 Australia Street, Camperdown sold for $2m on a 2.6 per cent yield, achieving an impressive building rate of $10,204 per square metre.
“Although 2019 has had its challenges, when we briefly glance at what occurred globally, it is evident factors such as the federal election, global uncertainty (through US and China Trade Wars, Brexit, Hong Kong riots) and the RBA’s decision to drop interest rates to the lowest in Australian History (0.75%) have all in some way, shape or form had an effect on Australia’s property market. Whilst the residential market has seen a significant slowdown in sentiment, there is still increasing momentum in the commercial sector.
Office
According to Tom Mott, State Director – NSW Office Leasing at Savills Australia, the Sydney CBD office market in 2019 was driven by supply constraints. One new prime grade development reached practical completion with near 100% commitment being Investa and Gwynvill’s 60 Martin Place, Sydney, where they achieved a rent of $1,830 net for the top floor.
The world class Quay Quarter Tower (50 Bridge Street, Sydney) development will end 2019 with circa 98% commitment despite completion not anticipated until 2022.
Leasing volumes in the Sydney CBD remained below historical averages in 2019. A number of factors influenced this which included Co Working disruption to the 100-500sqm market, lack of attractiveness around deals enticing tenants to move, owners renewing leases well in advance of expiry and at times a sense of uncertainty around the economy.
There were however a number of significant leasing deals, those included Deloitte who secured 32,000 square metres in AMP Capital’s development Quay Quarter Tower (50 Bridge Street), Wework at 320 Pitt Street where they will occupy 11,000 square metres & Lend Lease has secured Salesforce to anchor 24 floors of its 53 floor $1.9 billion Circular Quay development.
“There were also a number of significant deals which occurred in advance of lease expiry, QBE, Boston Consulting Group and First State Super all committed to new premises and left behind sublease space or premises to be assigned. The combined Net lettable area of these three moves was approximately 25,000sqm.
“With the release valve of supply not forecast to hit the market until 2023 onwards, the outlook for 2020 remains strong, we anticipate positive net absorption, effective rental growth and generally fertile conditions to do business,” said Mr Mott.
Hotels
The Australian and New Zealand Hotel sector looks set to finish 2019 on a high, with all states and territories recording double digit growth in domestic expenditure.
For year ending June 2019, Australia’s international visitors have increased by 2.8% to 8.6 million, domestic visitors increased by 11.7% to 113.3 million and New Zealand’s international visitors increased by 2.5% to 3.9 million.
According to Michael Simpson, Managing Director, Hotels at Savills Australia, of the 10 Australian key hotel markets for year to date October 2019, six achieved occupancy in excess of 77%, reflecting the continuing growth in International and Domestic Visitors.
“Growth in demand for rooms was achieved in eight markets with seven of those markets also experiencing increased new room supply.
“Overall, Sydney was the top performer nationally (in terms of dollar value of RevPAR $178), outperforming the next best performing market (Melbourne) by $31.
Mr Simpson said China remains Australia’s number 1 International Visitor representing 15% of the total share of visitors and recorded a 5.9% YOY increase in expenditure approximating $12b.
“The key growth market was India which rose by 11.6% in terms of visitors and recorded a substantial growth of 21.9% in Visitor Nights (4m more Visitor Nights). Japan also reported a strong growth in Visitors up by 9.1% YOY.