Sydney a world-beater for office yields

A weakening Aussie dollar may be good news for the broader economy, but it’s unlikely to boost foreign investment in the real estate market.

Sydney might be Australia’s tightest office market, but on the world stage its yields are as good as it gets, according to new research.

A study of 54 cities across Asia, Europe, the United States and Australia shows that among the 11 gateway cities globally, Sydney has the most attractive market yields, averaging 5.62%.

Los Angeles West and San Francisco were the only other gateway cities to offer yields above 4.5% for A-grade office assets, Savills’ World Office Yield Spectrum shows, bolstering Sydney’s status as a prime destination for foreign capital.

Commercial market: US hits back in Australian property battle

Hong Kong presented the lowest yields at 2.71%, while Tokyo was at 3.4%, London at 3.48%, Paris at 3.51% and New York at 4.15%.

The report found yields among the gateway cities had firmed by an average of 32 basis points since December 2014, with Sydney leading the way at 100 basis points – more than double the drop in Hong Kong over the same period.

Sydney 's CBD office spaces continue to be highly sought after

Sydney’s A-grade office yields are proving attractive to overseas investors.

It comes after and Real Capital Analytics data showed the United States had re-emerged as a major player in Australia’s commercial property market, eclipsing China for investment so far in 2016 and proving Australia’s attractiveness to investors globally.

Overseas buyers pushed Australia to a record $31.1 billion worth of commercial deals in the last financial year, up almost 8% on the previous year.

Australia’s other capital cities, while not considered gateway cities, recorded even more enticing yields, with Melbourne at 6%, Brisbane at 6.86%, Adelaide at 7.91% and Perth at 7.99%.

Only Canberra shaded Sydney, with A-grade office yields averaging 5.56%.

In the report, Savills Australia head of research Tony Crabb predicts Australia’s yields will continue to tighten.

“Commercial property investment yields firmed across the board – a theme we have been writing about for several years now,” he says.

“We still do not believe it has fully run its course. In some markets, fundamentals are improving rapidly. We believe this improvement will lead to further tightening in yields as investment capital starts to price in expectations of future NOI growth.”

“This part of the yield cycle is just beginning.”