Two Australian office markets tipped for fastest prime rental growth globally in 2019
Sydney and Melbourne are expected to experience the fastest prime office rental growth globally in 2019, which will contribute to both cities continuing to attract the attention of a broad-range of cross-border and domestic investors.
As Sydney and Melbourne are experiencing tight supply due to sustained employment growth and relatively low levels of development completions in recent years, Knight Frank expects throughout 2019 prime office rents will rise 9.3% in Melbourne and 6.7% in Sydney.
This follows an already strong year of prime office rental growth in 2018, with Sydney experiencing a 11.9% increase and Melbourne seeing a rise of 13.9%.
While many cities around the world are feeling the impact of slower economic growth and geo-political risks, most major office markets continue to benefit from robust demand for business space. This is coinciding with fewer major developments reaching completion, as the uncertain political environment has deterred some developers in recent years, and subsequently we are seeing supply tightening rents edging upward.
Sydney and Melbourne in particular experienced a supply crunch in 2018, with dwindling availability and robust absorption driving the surge in office rents. A subdued development pipeline for 2019, in addition to sustained demand-side momentum, makes a compelling case for further growth this year, and although the pace will moderate from the 2018 levels, Sydney and Melbourne will remain amongst the world’s fastest growing markets.
Knight Frank expects that as the year progresses the market will undergo a transition from yield compression to rental growth as the primary driver of performance.
The Australian office market is forecast to see total returns of 11.4% on average, and as such the window of opportunity for investors is still well and truly open. However, greater selectivity will be needed in 2019 to ensure investors identify markets and assets with the best prospects of rental upgrowth.
Beyond the Sydney and Melbourne CBDs, emerging fringe and suburban markets continue to offer substantial growth potential. Looking around the rest of the country, improving leasing market sentiment in Perth and Brisbane means the perception of risk will subside and investors seeking higher returns will likely be attracted to these markets in greater numbers.
While the abolition of stamp duty on commercial property in Adelaide and attractive yields relative to the tight East Coast markets has put it firmly on the radar for a growing number of domestic and international investors.