The Sydney CBD at 5.1 million sq m is more than double the size of the Brisbane CBD (2.3 million sq m) and as both are surrounded on three sides by water, this has shaped development and also pushed demand to non-CBD and increasingly fringe urban regeneration sites. The Brisbane market has seen more decentralisation to immediately adjacent locations, whereas Sydney has many more suburban satellite markets of scale, which has pushed demand further afield. However, centralisation, driven by infrastructure investment, appears to be gaining traction in the Sydney CBD.
PRIME CORE MARKET YIELDS & SPREAD SYDNEY CBD V BRISBANE CBD
SHAPING THE MARKETS
Shaped by the underlying economic drivers, the two markets have achieved periods of strong demand, however at differing speeds and timing. While both cities felt the initial impact of the GFC, Sydney’s exposure to the Finance & Insurance sector led to a sharp fall in occupied space during late 2008 and into 2009. In contrast the Brisbane CBD, boosted by strong conditions in the resources sector, was achieving strong take-up defying the broader national conditions. In 2013, the combined impact of a sudden downsizing in the State Government headcount, vacating circa 70,000 sq m of stock, and the loss of profitability in the resource sector, led to a sharp fall in demand within the Brisbane CBD. Spurred by a resurgent NSW economy, driven by a huge transport infrastructure pipeline, the Sydney CBD market has been on an improving trend since late 2013, accelerating since then.
Considering the major office occupiers for the two cities, it is easy to see why this divergence has emerged. The industry structure is very different, with 30% of Sydney CBD white collar workers in the Finance & Insurance sector while in Brisbane this is only 13%. In contrast, in Brisbane 20% of workers are aligned with public administration compared to only 6% in Sydney, and the mining, manufacturing, construction and utilities sector is double the size in Brisbane. Importantly for Sydney over the past two years, has been the larger exposure to the IT sector, with the technology and creative services sector being a large contributor to growth.
NET ABSORBTION SYDNEY CBD V BRISBANE CBD
NET ABSORBTION AS A % OF TOTAL STOCK, PER SIX MONTH PERIOD
The resources sector has a multiplier effect on office demand and the 8% exposure in Brisbane translates to a greater contribution to the office market; however compared with Perth (with 20% aligned to the mining sector) the Brisbane economy remains relatively broad based, with education and tourism occupiers also prominent.
FOLLOW THE MONEY
Investment in Australia, particularly office and hotel buildings, has been growing strongly, supported by the relatively higher yields still to be found in the market. In the office market, during 2015 over $9.12bn worth of property changed hands in Sydney, 57% of Australia’s total turnover for the year. Investors, particularly foreign, were attracted to this global city with an improving tenant market and strong investment fundamentals.
In contrast Brisbane attracted 12% of total office investment at $1.96bn. As yields for core assets continue to fall under the weight of money seeking a safe return and with the expectation of lower for longer interest rates, there is also a greater weight of funds seeking a relatively higher return. Increasing interest in markets such as Brisbane is now in force, with indications that the negative influences in the tenant market have abated, and an expectation that the government sector is expanding once again.
The yield gap between Sydney and Brisbane is at the highest level in 15 years, and there is the potential for this to narrow in the near future, which is attracting value add buyers to the city and increasing the depth of offshore buyers.
The mining investment boom contribution to growth is reversing and there is a switch in drivers of the economy towards residential construction, transport infrastructure spending and the services sector including the technology and creative services industries. This is a clear positive for Sydney. However, Brisbane is a diversified economy and besides the large exposure to the business services sector, the government sector is on the cusp of an expansion, following sharp cuts in the preceding three years.
There continues to be divergence in the short term market conditions and rental growth performance in favour of Sydney, however we expect investment and occupier demand to pick up in Brisbane over the coming year, as investors begin to embrace more risk and seek higher relative returns.