Transaction volumes in North Sydney are approaching the AUD 1.0 billion mark for the first time on record (AUD 955.42 million). To put the current figure in context, the previous high was in 2001 when AUD 509.4 million worth of product traded. The fund-through acquisition of 177 Pacific Highway (AUD 413.19 million) is the largest single asset transaction in the North Sydney market since Jones Lang LaSalle formally started reporting transactions in 1987. The transaction was interesting from a number of aspects:
Investor demand for large assets with core characteristics is strong. Passive investors have looked to acquire modern assets with strong covenants, long WALEs and the latest in sustainability credentials. The universe of this type of product, however, is limited. Over the past 10 years, less than 50 assets in excess of 30,000 sqm were created across core office markets in Australia. The acquisition of 177 Pacific Highway highlights that when an opportunity emerges to acquire an asset in this cohort of the market, investors are willing to compromise on location for additional yield.
With a shortage of core product available, a number of investors have moved up the risk curve to acquire assets with shorter WALEs or upcoming capital expenditure requirements in North Sydney. Recent transactions include: Northpoint at 100 Miller Street, which was acquired for AUD 279.7 million by Cromwell and Redefine Properties (South African), while 99 Walker Street was purchased by Investa Office Fund (IOF) for AUD 124.9 million.
Part of the willingness for taking on additional risk is the positive market fundamentals of the North Sydney office market. We believe North Sydney offers a compelling investment proposition. The North Sydney vacancy rate (direct) is 7.4%, the supply-side of the equation is well managed (the next development project is not scheduled to reach practical completion until 1Q16), while prime net face rents have risen by 28.7% between 2007 and 3Q13. The Sydney CBD, on the other hand, has only recorded prime net face rental growth of 14.3% over the same time period.
Furthermore, asset pricing in North Sydney is attractive relative to the Sydney CBD. The tighter end of the North Sydney yield range (7.00% to 8.00%) is 100 basis points higher than the Sydney CBD. Over the past 10 years, the benchmark yield spread between the two markets was 85 basis points.
Historically, the yield spread between North Sydney and the Sydney CBD has been heavily influenced by the level of liquidity in North Sydney. With liquidity at record levels and unsatisfied capital looking for product in North Sydney, there is scope for further yield compression in North Sydney over 2014.
About the author
Rachel Johnson is a Market Research Analyst for Jones Lang LaSalle, based in Sydney, Australia.