Buying a strata office in the Sydney CBD? The 2018 market has just opened and the signals are mixed

March 2nd, 2018

With interest rates so low and offering small businesses and professionals the chance to own and occupy an office via a leaseback from an SMSF, the Sydney CBD strata suite market has been hot for over 18 months with demand massively exceeding supply. This has not always been the case with many suites in high demand today being found in buildings which not all that long ago experienced neither capital gain nor rental growth for a decade.

Most popular are suites between 50 and 100 m2 especially in Sydney’s financial core from Circular Quay to Market Street and west of Macquarie Street towards York Street.

Over those 18 months, the ex GST rates/m2  paid by buyers have increased from around $10,000/m2 to over $15,000/m2. Recent examples include a 10 th floor, refurbished 43m2 suite at 1007/37 Bligh Street, Sydney which sold on 9 October 2017 for $14,906/m2 .

That result was surpassed just a month later on 2 November 2017 by the $15,234/mpaid for the fourth floor, 64m2 north west corner suite at 404/234 George Street, Sydney.

For suites in that pocket with lots of natural light, on a corner or having a northern aspect, it is our experience as buyers agents working in this sub market that the going rate has now breached the $16,000/m2  barrier.

Also adding to the precinct’s appeal is the new Wynyard Walk to Barangaroo and the inevitability of the CBD and South East Light Rail along George Street.

With a few exceptions such as 66 Hunter Street, Sydney most are located in B Grade buildings refurbished last decade.

One of the other turbocharging factors has been the recent withdrawal of much of that stock from the office leasing market by large scale resumptions for the Sydney Metro. Contributing to the demand is the promise of that Metro with buyers now able to see those buildings being replaced by bright blue construction hoardings trumpeting 31 new train stations.

Other such buildings have been withdrawn from the market by the redevelopment of Circular Quay while some of those left standing like 34 Hunter Street, Sydney have been extended and converted to 4 star hotels.

The net effect of these withdrawals is a current acute shortage of supply.

Time will tell whether all these factors have created a perfect storm for strata suites in the Sydney CBD that will lead to a future price correction once more and newer office stock is released to the market in the next two or so years. Tending in the same direction is the advent of co working spaces which are growing exponentially overseas and now in Sydney.

In this context and given the notorious downturn in Sydney’s residential property market in Q3 and Q4 2017, it is hardly surprising there was keen interest in seeing if the same fate awaited strata suites at the first such auction of 2018 last Tuesday when not just one but and unusually, three such suites were up for grabs.

The first was a renovated and vacant whole floor comprising 163 m2 over three separate titles on Level 8 of 300 George Street, Sydney; the best feature of which being that it’s opposite Wynyard.

The other two suites were next to each other on Level 12 of 23 Hunter Street, Sydney. Known as Suites 12.02 and 12.03 and comprising 98m2 and 115m2 respectively, both are north facing with 12.03 being the far superior of the two because of its corner position allowing natural light from three sides, a glimpse of the Harbour Bridge down Pitt Street and an almost expired lease.

In contrast, 12.02 has neighbouring suites on both sides and light only from the north with vacant possession not being available until July 2019.

The results confounded all experienced participants in the room.

The vendors of 12.02 and 12.03 may have experienced nervous moments when and after a low energy auction, the hammer eventually fell on Level 8, 300 George Street. The first property of 10 in the order of sale, it sold for $1.95 million which equated to a meagre $11,963/m2.

In a predictable move by both vendors at 23 Hunter Street, the superior 12.03 was placed ahead of 12.02 in the order of sale where it sold for a record breaking  $1.8 million which equated to $15,652/m2.

The record did not stand for long: 12.02 sold to the under bidder on 12.03 for $1.63 million which equated to $16,633/m2.

A 6.3% higher rate/m2 for an inferior suite with no vacant possession and three versus five genuine bidders? Go figure.

The other complicating factor at 23 Hunter Street, Sydney making it difficult to draw inferences is a proposal to amalgamate that building with its southern neighbour at 105 Pitt Street and sell off both buildings at a premium ( eg: $25,000/m2) to make way for the development of a major 200+ m high tower in the next property cycle.

The signals for this popular niche market from the three auctions are mixed.

While the two results at 23 Hunter Street set new records, that was achieved by only a handful of far from exuberant bidders; one of whom bid on both lots. This observation, together with the lacklustre experience at Level 8, 300 George Street suggests the froth may be coming off as credit and other restrictions begin to bite.

As we said, time will tell.

Meantime and as is always the case, it only takes two to start a fight at auction.