Sydney’s property market 2025 First Quarterly Report – New year. New era.

Overview

2025 got off to a flying start. Making up for an exhausting and early end to 2024, an army of agents was back at the desk just after New Year responding to inquiries from more energised and confident buyers.

In a trend buoyed by a long awaited 0.25% interest rate reduction on 18 February 2025 signalling an end to the rate tightening cycle, residential auction clearance rates and some median prices rose, commercial property turnover was healthy with industrial and logistics still the strongest performing asset classes, (at least for now) followed by shopping centre retail.

However, enthusiasm start to curb in the residential market by about the end of February with cooling clearance rates and buyers becoming more cautious likely in response to Trump’s MAGA, ongoing geopolitical uncertainty and as is usual, a looming Federal election.

While Federal budgets often have a dampening effect, the irrelevance of this year’s budget to property markets was notorious well before it was handed down on 25 March 2025.

Nevertheless as we discuss, much happened this quarter and so many trends emerged which will influence Sydney’s property market over the longer term and which we believe marks the beginning of a new era.

Offices – has the cycle turned?

For some, offices in Sydney’ CBD core was the sector to watch with several reports of a bounce back such as this on 20 February 2025 in the Urban Developer:

“You can only buy Sydney CBD office for one or two years in a 10-year cycle.”

And it would seem the starter’s gun has fired with a number of recent transactions punctuating the city’s resurgence.

The bellwether market is showing strong signs of recovery as yield softening stabilises, according to Colliers head of office capital markets Adam Woodward. 

And the international capital is flowing in…

“Sydney has always been the first market to recover from any kind of downturn.”

Woodward says [in the 12 months to 20 February 2025] there have been eight transactions in the core market that made it “very hard to dispute” the turning point had been reached and that valuations are at the right level to enable transactions to take place…

 “And we’ll start to see, as the financial core tightens, more deal flow in the western corridor into midtown and other parts of the city that aren’t trading as much at the moment. There will be more confidence from buyers to buy into those parts of the city.

“In Sydney’s CBD there’s no new supply coming, it doesn’t stack up at the moment … which is very good for incumbent owners, especially owners of the high-quality stock”…

“To pull together a site and then to get planning approval is a real challenge. It takes five to 10 years to do that, and then once you’ve got approval and the feasibility stacks up and the conditions are in favour to pull the trigger to start developing, it’s a three-year build job,” he says. 

“Flight to quality has been the only key thematic from an occupier perspective post-Covid. There were so many hypotheses about what might happen and what tenants might do, and all the terminology of hub and spoke and the satellite office and the work-from-home piece, that’s all disappeared.”

Significant transactions in this quarter included the following with the last of these being the largest Sydney office transaction so far this year:

Others, including veteran property observer, Robert Harley, rightly are more sanguine noting in an AFR article on 27 February 2025 that whilst the commercial property trough might have peaked leading to the beginning of a new cycle, …”only the office sector has seen a further fall in valuations”; an observation consistent with the fact – omitted from the Urban Developer article above – that all eight of those sales were at a loss.

Similarly, to assert that  …“the terminology of hub and spoke and the satellite office and the work-from-home piece, that’s all disappeared” to the say the least, is heroic as we discuss next.

On balance however, even the more nuanced commentators such as Harley don’t dispute the overall office trend adding that those valuation declines are at 3.5% which “is marginal compared to earlier periods…[and Charter Hall’s ‘never puts a foot wrong’ David Harrison] argues that cap rate decompression is now “overdone, particularly for good quality assets.”

Work from home (WFH)

In addition to a divergence between the Federal and NSW Labor governments, WFH this quarter vaulted into a Federal election issue before the Opposition’s spectacular 7 April 2025 back flip with reams having been written this quarter both for and against it.

However and as we have said consistently despite the benefits of WFH especially for women and people with disabilities, the long term trend favouring a return to the office is clear and evident in our daily attendances at the city office.

As the AFR reported on 10 February 2025:

“The drumbeat of tougher office mandates will send tens of thousands of extra workers back into city workplaces across the nation each week, boosting retail spending and demand for workplace space, according to industry research.

As big corporate groups such as retail rivals Woolworths and Coles issue stricter requirements for their staff to be present in the office, the number of days on average mandated to attend workplaces is also increasing.

A separate analysis, by Barrenjoey’s Ben Brayshaw, of big multinational companies that are tenants in Australia found the weighted average number of days spent in the office had increased substantially from 2.5 days a week in the middle of 2023 to 3.8 days a week by January this year.

That trend was boosted by the tough five-day office mandates laid down by some well-known US companies, including Tesla and Goldman Sachs.

“We expect return-to-office mandates to continue due to an emphasis on improving workplace culture and productivity,” Mr Brayshaw wrote…

Belinda Cheung, a fund manager at the listed Centuria Office REIT, which runs a $1.9 billion portfolio of office towers, said the platform regularly surveyed its corporate tenants on their occupancy plans and use of mandates.

The two days in the office that was common immediately after the pandemic was now more likely to be three or four days, she told The Australian Financial Review this month.

“What we noticed in the last survey is that there are less and less remote-centric mandates and more and more in-office requirements. It’s increased over time. That’s a massive improvement from where it was four years ago”…

 “We’re definitely hearing a lot of that from tenants. It’s a fairly consistent message.”

This contraction to the centre and its implications for the Sydney residential and commercial property markets are reinforced by data regarding usage of the game changing Metro and which, incidentally, has not occurred at the expense of the heavy and light rail networks.

As reported in the 18 March 2025 SMH:

“Greater numbers of commuters than forecast are piling off driverless metro trains at Sydney’s massive underground station at Martin Place in the central city during the morning peak on weekdays…

Some 17,000 people tapped on and off at Martin Place station on average during the morning peak between 6.30am and 10am on weekdays in February – up from 15,000 in November. Sydney Metro’s 2024 forecast for the station was 15,600 people during the morning peak… 

Gadigal station near Town Hall is the other to surpass forecasts. About 9700 people on average tapped on and off at Gadigal in the morning peak in February, up from 8100 in November and greater than the 2024 forecast of 7500.

The entries and exits for all six of the new stations on the M1 line, as well as the metro platforms at Central, were higher in February than November…

Crows Nest, Victoria Cross in North Sydney, Barangaroo and Waterloo stations are yet to surpass pre-opening forecasts for total movements.”

Trump

The column space devoted to Trump’s tariffs dwarfs the attention given over the same period to WFH.

Hardly surprising given that many regard those tariffs as the biggest upheaval in global trade in 80 years and if sustained rather than being a negotiating tactic by Trump, alone marks the start of a new era.

The known knowns include that MAGA will hammer the share market, domestic super’ portfolios (especially given their exposure to US equities) and wealth effects in the short to medium term.

In that period and just as we experienced during the GFC, there will likely be excellent buying opportunities especially in the top end Sydney residential property market whose owners are most linked to the share market.

A known unknown is how other countries will react to Trump’s tariffs.

With the US accounting for about 6% of Australia’s exports, it is also certain that the effects will not be direct but indirect via their effects on the economies of Australia’s major trading partners.

On that scenario and regardless of many predictions being thrown around, the most likely and which seems to be emerging as the favourite, is a progressive reduction, as soon as 20 May 2025, in local interest rates to counter both a US and possible global recession.

If that happens and history is any guide, it will cause the local property market to boom driven also by a perception of Sydney residential and commercial property as a safe haven.

Also interesting to watch will be how the growing cohort of private credit providers respond to such a market shift (more on them in a later Newsletter).

The undoubted known known is that the current leader of the so called free world will influence Sydney’s property market unlike any of his modern predecessors – including himself!

Two year temporary ban on foreigners buying existing housing

Announced this quarter and coming into effect on 1 April 2025, foreign buyers will not be permitted for two years to buy existing Australian residential property.

Rushed through and although designed to ease the so called housing crisis by stopping access of foreigners to existing property, the Government’s initial failure to clarify that foreigners could still buy off the plan and new properties caused industry confusion.

While the number of foreign residential buyers has dwindled in recent years and we know of several foreign owners trying to sell their existing residences under the weight of punitive State duties and taxes, it remains to be seen whether a Trump induced decline in the Australian dollar will reverse that trend.

And speaking of off shore interest in Sydney property, a growing sector which has attracted significant international investment is build-to rent (BTR) with one of several big announcements this quarter being plans filed by student housing provider Scape to build NSW’s largest BTR development so far. Known as Timberyards and in Marrickville, it is backed by several off shore giants including the Dutch APG, South Korea’s National Pension System, Bouwinvest and UBS Asset Management.

NSW Low and Mid Rise Housing Policy

On 28 February 2025 and with immediate effect, the NSW Government announced this policy to supplement last years’ Transport Oriented Development (TOD) policy, the latter of which to date continues to attract little developer interest except for a few pockets on the upper north shore and on the lower north shore around Crows Nest and St Leonards.

According to the Government, the object of the latest policy is to ‘fast-track a greater diversity of homes like residential flat buildings of 3-6 storeys, terraces, townhouses, duplexes and smaller 1-2 storey apartment blocks in suburbs where they are not currently allowed.’

Revolving around 400m and 800m walking distances of 171 nominated NSW rail stations and town centres, the new policy rules are complex, often poorly drafted and beyond the scope of this Newsletter.

In our experience to date, although technically applicable, these rules have been irrelevant to two of our clients because in one case, six storey buildings already exist in the nominated zones and in the other, the new rules clash with preserved council planning controls.

Undoubtedly there will be selling and buying opportunities for others but as with TOD, time will tell just how many come to fruition.

We suspect one of the main initial beneficiaries of this policy will be planning lawyers such as Mills Oakley which, in an excellent article on 2 March 2025 directed to developers, concluded:

“Regretfully…[arguments]…will need to be advanced on a site-by-site basis — with each case turning on its own merits.  It is unlikely that any single Court decision could resolve this issue across the board.

Whilst, overall, the Low and Mid-Rise Housing Policy is a very positive measure, it is disappointing that the NSW Government has been unwilling, or unable, to cut through local controls, such as setbacks and heritage conservation area restrictions, to clearly and consistently establish standards on which developers can rely.”

Tenancy changes

From the NSW Fair Trading website:

“Key changes [announced this quarter and] starting on Monday 19 May 2025

While potentially beneficial to renters, we would not be surprised if the law of unintended consequences applies with these reforms (particularly the long notice and re-letting periods in the first three items above) actually exacerbating a housing shortage.

With pre-reform red tape, high interest rates, rising land tax and spiralling insurance premiums (see below), the net income returns to landlords/investors from residential properties continue to erode.

The undoubtedly substantial extra costs and time needed to comply with these latest reforms may prove for some to be the final straw resulting in another new era with properties being withdrawn en masse from the rental market and/or returned to the short stays market where these reforms do not apply.

Climate risks, especially flooding and insurance costs

On 9 March 2025, Cyclone Alfred reached mainland Queensland and although mercifully not quite the disaster predicted, still claimed lives as well as caused massive property and infrastructure damage.

It was one of several east coast inundation events just before and after this quarter including major December 2024 flooding in Double Bay, Woollahra, Bondi Junction and Strathfield and massive flood damage in Bondi, Dolls Point, Coogee and other coastal suburbs on 1 April 2025 with locals for 50 years reporting having never seen anything like it.

Such disasters have profound direct and indirect effects (including on the inflation rate) as insurers seek to recoup losses and reinsurance costs with increased premiums.

As the SMH reported on 14 March 2025:

The average premium across Greater Sydney is $3200 a year, 66 per cent higher than in 2020, according to the figures from actuarial and insurance consultancy Finity… [whose]… figures suggest average premiums have climbed more steeply in some Sydney LGAs than others – almost doubling in Northern Beaches Council in just five years and rising 88 per cent in Ku-ring-gai Council area and 87 per cent in Sutherland Shire Council… Finity principal Stephen Lau said the 2022 floods were the second most expensive catastrophe over the past 50 years…

“Flood because of the way that it damages property when it gets inundated, it can cause a total loss very quickly,” Lau said. “You’ve got bushfire mitigation and firefighting efforts that can suppress the risk of fires, whereas with floods, you don’t.”

And as Crikey reported on 31 March 2025:

 “[Insurance] costs are already rising rapidly: in Australia, every year since 2013 has seen more annual insured losses than the combined losses of between 2000 and 2004.”

The last word on this era changing topic as these recent flooding disasters underscore, belongs to Dr. Günther Thallinger, an Allianz SE board member who, in a recent Linkedin article said:

“Heat and water destroy capital… flooded homes lose value… and can become uninsurable… a house that cannot be insured cannot be mortgaged. No bank will issue loans for uninsurable property. Credit markets freeze [which] means no more mortgages, no new real estate development, no long-term investment, no financial stability… the financial sector as we know it ceases to function.”