Nearly 40 percent of the $26.9 billion total Australian investment in commercial property in 2016 was spent in New South Wales with office investments accounting for more than half of the Sydney spend according to Savills Australia’s latest research.

Savills National Head of Research, Tony Crabb, said investors spent a total of $9.9 billion in Sydney, including $5.7 billion on office property - 41 percent of the national market - $1.94 billion on retail (30%), and $2.3 billion (36%) on industrial property.

He said the office market breakdown included $2.4 billion in the CBD and $2.1 billion across the combined north shore market, while the big four investors, including a foreign contingent (33% of office sales), Privates (30% of industrial), Trusts (25% of retail) and Funds, accounted for more than 75 percent of the sales.

Some of the more notable transactions included:

• 1 Shelley Street - Purchaser: Charter Hall/Morgan Stanley | Price: $525 million on a 5.17% yield
• 420 George Street - Purchaser: Investa (75%) | Price: $442 million on a 5.3% yield
• David Jones - Purchaser: Scentre Group/Cbus | Price: $360 million on a 4.5% yield
• JPMorgan Portfolio - Purchaser: AMP Diversified | Price: $250 million on a 6.5% yield
• Goodman Portfolio - Purchaser: Blackstone | Price: $195 million on a 6 to 7.5% yield

Mr Crabb said the demand for Sydney property had seen yields firm across all sectors with the average yield for A Grade office buildings in the quarter to December at 5.38 percent, a 75 basis point firming over the last 12 months, while retail yields for enclosed centres were at 4.5 to 8 percent, a 50 to 100 basis points fall.

He said prime industrial yields firmed 25 basis points over 2016 to now range between 5.75 and 6.5 percent in South Sydney, between 6 and 6.75 percent in the West, and between 7.5 and 8.75 percent on the North Shore. 

Savills Managing Director NSW, Simon Fenn, said the expectation was that the NSW investment market would continue to perform well across all sectors in 2017 with investors in the office market buoyed by the prospect of rental upside in a landlord’s market as the vacancy rate continued to fall.

“Yields have firmed and will continue to do so in Sydney’s office market but the upside is that we will see significant rental growth and that factor, perhaps more than initial yield, will be the key investment driver this year.

“Unlike 2016, we do expect some stock to be formally marketed in the first part of the year as some owners take advantage of the pent up demand to buy in Sydney,” Mr Fenn said.

He said industrial property, which in trend terms had outperformed other sectors in 2016, should continue to attract investor interest particularly in the transport & logistics sector and particularly for assets that offered long WALE and/or future development upside.

The $2.3 billion spent on NSW industrial property in 2016, Mr Crabb said, was commensurate with the $2.3 billion spend in 2015 and well over the five year, $1.97 billion, average.

Mr Fenn said retail, the traditional defensive investment, was also expected to perform well again this year.

“We’ve seen yields for enclosed centres fall below 5 percent and that’s as much a measure of increased demand as it is the security of lease profiles especially for supermarket anchored neighbourhood centres.

“Demand for retail assets is not the issue, rather the availability of assets on the market will be the key determinant of sales volumes this year,’’ Mr Fenn said.

He said there was evidence that the bigger players were increasingly being forced to look at the smaller end of the market for opportunities driving sales in so-called alternative markets such as petrol stations.