LOW INTEREST RATES PUSH SYDNEY OFFICE YIELDS TO PRE-GFC LOWS

OFFICE yields have dropped to a pre-GFC low in the Syndey CBD and could fall further new CBRE research shows.

CBRE's latest Market Flash shows that Sydney CBD core prime office yields reached a nine-year low of 5.2% in Q3, while secondary yields are 20 basis points off their pre-GFC low of 5.9%.

CBRE's senior director, Sydney CBD Office, Valuation & Advisory Services, Michael Pisano, says that while the office sector is reflecting similarities with the market pre-GFC, there were key differences that suggest the current growth cycle could be maintained for longer.

"Capping off an impressive run in yield compression over the past three and a half years, Sydney CBD office yields have reached pre-GFC lows - without the same level of market rental growth to stimulate pricing when compared to the market in 2007," says Pisano.

"Evidencing this, the drivers of the current market are vastly different when compared to the previous cycle, which further suggests a greater degree of sustainability."

In the current market, the sustained low interest rate environment has been the main driver of yield compression compared to optimistic income growth assumptions.

CBRE Head of Research Stephen McNabb says the Reserve Bank's approach to monetary policy has created an environment conducive to a healthy commercial property market.

"A long period of lower interest rates has been the key stimulus to the current cycle, however the next phase will be supported by lower vacancy rates and forecast rental growth," says McNabb.

The other difference between now and the pre-GFC peak is that the fundamental outlook for the Sydney office market is looking solid. Vacancy - currently 5.6% - is expected to fall to 3.3% by 2018 and prime effective rent growth is running at a 23% annual rate in Q3 2016."

He adds: "Importantly this rent growth is following, not leading, the yield compression which is in stark contrast to the performance of the office market after the GFC."

Strong rent growth in Sydney could provide further scope for yield compression, however there is an absence of prime stock being put to the market at present.

"Importantly though, we will witness activity in the second half of 2016 in support of yield compression in the secondary market and the narrowing of the gap between prime and secondary yields," Pisano explains.