Sydney Commercial & Industrial Property Market Review - August 2023
“Prices for prime buildings and land appear to be holding relatively well, their prices being supported by a continued imbalance between demand and supply.”
In our opinion we have past the peak of capital values and there has already been some discounting in prices, particularly for secondary buildings. We feel buyers no longer have the ‘fear of missing out’ and remain cautious given the additional costs of financing purchases.
Prices for prime buildings and land appear to be holding relatively well, their prices being supported by a continued imbalance between demand and supply. However we believe it is only a matter of time before these prices are further affected by the impact of multiple interest rate increases since March 2022, the sharpest flurry of rate increases in 4 decades. With inflation at approximately 7% and exceeding market expectations, economists are predicting further interest rate increases in the second half of 2023, strengthening our view that capital values have peaked for this cycle.
Rentals on the other hand continue to be resilient, with most rentals in Western Sydney starting from around $200psm net even for secondary space and quality modern warehousing now approaching $250-$275psm net in several areas. South Sydney is recording rentals regularly approaching $450psm net in prime Alexandria, with Botany/Matraville seeing rentals around $350psm net. The main reasoning behind this substantial growth has been as an imbalance between demand and supply, but also the increased cost of construction over the past few years and investors demanding higher yields as a result of higher servicing costs for loans and as a means to maintain asset values in the face of property yields beginning to soften.
Outgoings have also increased dramatically, mostly related to sharp rises in insurances and land values, the latter impacting land tax and council rates. The questions we are often asking ourselves – can occupiers sustain the current gross operating costs they are paying and will occupiers who are still under legacy leases be able to cope with sharp increases in rentals once they are exposed to market reviews? Time will only tell, however it is clear many businesses are being cautious and tightening their belts as the pressure to maintain margins becomes increasingly difficult. As the global supply chain issues begin to iron themselves out post covid, businesses may start to reduce inventory levels, particularly in the face of high property and operating costs. This may result in an increase in the supply of warehouse space in the form of sub lease accommodation.
Mark Cadman, Link Property Services