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News release

Strong finish to 2011 in Sydney commercial market expected after slow start

Office sales activity as at 28 November showing the fourth quarter is building up

SYDNEY, 5 DECEMBER 2011 – The volume of sales activity in the Sydney Office market is building up as we move into the final part of the fourth quarter.

As at 28 November, sales for the fourth quarter in Sydney office are already one-third of the total figure for the first three-quarters of the year.  Volumes for Q4/2011 (as at 28 Nov) reached $456 million, compared to $1.21 billion for Q1-Q3/2011.

Jones Lang LaSalle’s New South Wales Managing Director, Michael Fenton said the firm was expecting a flurry of activity in the final month of the year.

“It is shaping up to be a fast finish to the year after a slow start,” Mr Fenton said.

“Sales campaigns are nearing completion and we are seeing a cautious optimism amongst investors and occupiers.  We expect this sentiment to remain as long as global financial markets remain stable.”

Mr Fenton, also the firm’s National Head of Industrial, said industrial markets across Australia had performed well in 2011.

“The key themes that have contributed to the strength of the industrial market this year have been the emergence of foreign buyers, further consolidation in the sector with some of the bigger players including Stockland and Mirvac signalling their intention to exit industrial, yields have stabilised and the sector has experienced short term rental growth.

“We expect these key themes to remain dominant in 2012.  Foreign buyers are expected to remain active.  There will be increased competition for product between offshore buyers and local institutions including Dexus, Charter Hall and GPT as these major players continue to grow their industrial portfolios.  We also expect stock levels to remain healthy in 2012,” said Mr Fenton.

Director, NSW Sales and Investments, James Aroney said foreign investment was also a key theme in the Sydney office market this year and the expectation is this will continue in 2012.

“Direct offshore investment and  investment  through local intermediaries dominated the Sydney landscape and this trend will likely continue into 2012, although we will witness greater activity and competition from local superannuation funds, wholesale funds and selected REITS.

“2012 should prove another solid year for the Sydney sales market where we see a variety of vendors willing to capitalise on the strong Sydney sentiment. One of the key drivers will be a continued push by some REITS towards share buybacks at attractive levels in relation to their NTA. Other larger property groups will look towards recycling capital to deploy into development pipelines,” said Mr Aroney.

“In spite of the current uncertainty in word economies, banks are generally willing to lend on quality commercial assets and in some cases consider value-add opportunities such as 20 Martin Place which attracted a total of 19 bids when offered for sale a few months ago. This was clearly not the case during 2010 and the earlier part of 2011 where the banks had limited appetite for risk.

“Investors are now factoring in strong effective rental growth, particularly at the premium and A-grade end of the market  where we forecast stronger yield compression over the next two years in Sydney,” said Mr Aroney.

NSW Head of Leasing, Tim O’Connor said the outlook for rental growth in the Sydney Office market in 2012 was strong.

In line with the expected tightening of vacancy in the next few years, Jones Lang LaSalle Research has forecast prime gross effective rents in the Sydney CBD to increase by an average of 8.1% per annum in 2012-2014.

"The second half of 2011 has seen an increase in deal activity in the Sydney CBD leasing market with tenants continuing to take the opportunity to upgrade. Buildings such as 20 Bond Street and more recently 1 O'Connell Street have seen substantial take-up as companies seize the opportunity to consolidate and, in many instances, expand operations,” Mr O’Connor said.
“We have also seen a flurry of activity in the premium end of the market at both ends of the scale. Deloitte's renewal and expansion in Grosvenor Place across 28,000 sqm at one end with various part floor deals being completed at Aurora Place and Gateway at the other. What is interesting to note is the propensity to pay by the smaller companies looking to occupy space within premium buildings. This and the disappearing act of vacant space in these buildings will continue to see upward pressure on rents.
“We expect to see a similar theme throughout 2012 with various larger tenants at advanced stages of negotiation to upgrade and consolidate into prime assets. While options for larger tenants are reducing, existing buildings set to undergo major refurbishments including 52 Martin Place and 1 O'Connell Street will provide compelling opportunities. At the Premium end of the market opportunities are scarcer still with only 1 Bligh able to provide contiguous whole floors for lease," said Mr O’Connor.