CAPITAL MARKETS

According Ben Azar, NSW Director of Capital Transactions and National Head of Cross Border Investments at Savills Australia, the COVID-19 pandemic put investment on hold in the second and third quarter of 2020, with uncertainty around the new normal and its implications on office occupancy keeping investors on the sidelines. In the fourth quarter, we have seen market sentiment and transactions volumes improving drastically, a trend that will continue into 2021 as investor confidence returns.

“2021 will see investment activity resume and transaction volumes increase, following a cautious year for investors. Demand for defensively positioned assets will dominate the market in 2021, with the flight to quality trend causing further yield compression for Premium and A-Grade assets in core locations,” he said.
 
Regarding the Cross Border Investments market, Mr Azar notes that demand from offshore capital for Australian stock remains strong.
 
“The Australian government’s swift response to the pandemic has been recognised globally, and cemented Australia’s status as a safe-haven investment market with strong and stable economic fundamentals.
 
“Recent examples include the sale of 50% of 222 Exhibition Street Melbourne for $206m, 50% of The Rialto Melbourne for $644m and 100% of 45 Clarence Street Sydney for $530m – all to Singaporean capital. Furthermore, the 50% sale of Sydney’s Grosvenor Place for $925m to Chinese capital demonstrates the strong appeal of Australia office stock to Asia-Pacific regions.

“With multiple countries heading into second lockdowns, there will be no shortage of capital in 2021 trying to find a home in the Australian office market,” he continued.

ASIA MARKETS

Jordan Lee, Joint State Head, Asia Markets at Savills Australia said despite the global challenges of 2020, we are still experiencing strong investor appetite in the $50-100 million market, however demand for NSW assets in this price range far outweigh supply.

“With the Australian dollar being relatively low, we expect international demand for quality investments will only be driven higher, especially from Asia.

“As was the case in 2019, a lot of investors are looking for CBD office assets with future redevelopment upside and we expect 2021 to gather momentum early on, as capital look to park their money in safe haven assets”.

INDUSTRIAL & LOGISTICS

According to Michael Fenton, National Head, Industrial and Logistics at Savills Australia, 2020 saw the logistics sector in Australia catapulted to the preferred asset class amongst domestic and offshore investors.

“While the COVID-19 pandemic significantly contributed to this with the impact on other sectors, notably retail, office and hotels, the momentum for logistics as a preferred investment class has been building for years. The pandemic has obviously changed the behaviour of consumers, and particularly those who were late adopters of online shopping as a preferred method of making retail product purchasers.  

“Consequentially there has been a huge spike in demand for warehouse space in locations to meet the increased volume and expediency to meet consumer expectations of same day delivery.

“As logistics businesses have adapted their supply chain networks to meet these demands, a structural shift has occurred in the type and location of assets in higher demand.  Infill locations which can access a large number of households, and importantly high income households, are in the highest demand.  

“As a result, investors have pivoted their mandates to include these locations, which invariably involves older and smaller assets, than the traditional big box mandates common amongst the biggest domestic and offshore funds.

“These structural shifts in the type and style of assets in high demand from occupiers has seen investment yields set new records in the industrial logistics market in Australia in 2020.  With core yields now in the low 4% range and secondary yields within a 100-150 bps spread, the question for 2021 is – how much further can yields go before we reach the market peak?”

METROPOLITAN AND REGIONAL SALES

According to Nick Lower, Director, Metropolitan & Regional Sales at Savills Australia, the Savills NSW Metropolitan & Regional Sales team have experienced a continued rise in purchaser activity in Q3 & Q4 of this year.

“Having seen sentiment drop during the height of the pandemic, with interest rates falling to record lows and the government playing a pivotal role in stimulating the economy, we have seen a direct coloration in an increase in activity with a rise in consumer confidence.

“Though 2020 sales volumes have been lower than previous years, having a market riddled by a lack of supply has meant pricing has held strong despite global unease. Throughout the year we have seen strong appetite from investors who are searching for alternative investment options due to unfavourable returns being felt across most investment classes.

“Investors do remain wary of acquiring particular commercial classes, especially retail, though we expect to see the market react to this sector by viewing it as ‘opportunistic.”

“Overall, we expect 2021 to be more active, with money beginning to change hands more readily as a sign of things to come,” he said.

CAPITAL ADVISORY

According to Andrew Cottam, Director of Capital Advisory at Savills Australia, 2020 was a volatile year with most lenders pausing activity until the state of the market was known post lockdowns. The RBA also slashed interest rates to an all-time low of 0.10%, making the cost of debt extremely attractive for borrowers whilst property yields have remained relatively stable

“Opportunistic lenders have stepped into the market to capitalise on the increased caution of conservative lenders and are enjoying increased credit yields on quality transactions.

“In 2021 we could see challenges facing the commercial property market which haven’t filtered through in 2020 due to government and bank support. Lenders will be positioning transactions more conservatively given potential headwinds while equity will be searching for opportunities in COVID-affected assets.

“We expect higher transaction volumes in 2021 from pent up demand and greater certainty on the state of the market.”

OFFICE LEASING

According to Tom Mott, State Director – NSW Office Leasing at Savills Australia, the Sydney CBD office market in 2020 was like no other. A medical crisis led to a financial crisis which resulted in empty office buildings and a significant shift in fundamentals.

“The good news is the worst is behind us, office workers are returning, demand has returned albeit at below historical average, there is a buzz in the city again and office space is high on the agenda.”

Despite the challenges, there were a number of Sydney CBD 1,000sq m + leasing deals, those included Barrenjoey Capital Partners who secured a 3,250 square metre sublease in 161 Castlereagh Street, Resolution life who secured a 3,200sqm sublease at 400 George Street, FTI Consulting who secured 1,200sqm at 1 Macquarie Place.

“We are seeing more and more deals reaching heads of agreements and many more leases being negotiated. We anticipate the first quarter of 2021 to continue to build on the November and December momentum.

“In 2021, we anticipate the vast majority of office tenants with a lease expiry will test the market. We say this because the incentives on offer provide tenants the opportunity to chase better grade stock and change the way they work. Fit-outs are critical, and many of our clients are now spec fitting or refreshing existing space from small suites to whole floors.  

“Another 2021 trend we forecast is fringe and suburban markets and the interest around those. The 2024 metro station roll out and increased amenity around the likes of Green Square and Alexandria as an example have resulted in those areas becoming more considered”.

RESIDENTIAL SITE SALES

Despite the major disruption brought about by the pandemic, the Savills NSW Residential Site Sales Division has still managed to transact over $330m worth of sites across 12 sales, with a further $190m, across 4 sites booked to exchange early 2021. Apartment sites situated within close proximity to rail, retail amenity and educational facilities remain in high demand, especially within suburbs within the Lower and Upper North Shore, City Fringe and the Inner West.

As the toughest year in living memory comes to an end, many residential developers were able to look ahead and take this year as an opportunity to secure large scale well-located development sites for their future pipeline in anticipation of a quick recovery at the conclusion of the pandemic. With COVID-19 allowing more employees the opportunity to work-from-home in a more permanent capacity, people are rethinking where they want to live, as the shift in location preferences, now prioritising space over proximity to a CBD. This will see well serviced outer-ring suburbs such as Campbelltown and the outer-ring western suburbs, such as Westmead become more desirable into the future.

According to Stuart Cox, Director of Residential Site Sales at Savills Australia, 2021 has all the ingredients for a rapid recovery for the residential market, with record low interest rates, government grants and incentives (Homebuilder - $15,000, First Home Owner Grant - $10,000 and Stamp Duty Assistance Scheme – Up to $34,000) and the winding back of restrictive lending obligations which will make it easier and quicker for owner occupiers and investors to get a loan, once it comes into effect in March 2021.

“House and land developments experienced a huge resurgence during 2020 as developers took advantage of the various Federal and State stimulus programs currently available which were introduced to keep the construction industry going through the pandemic, these measures are expected to continue to strengthen the demand for house and land developments well into 2021.

“In addition, the high-end luxury apartment market outperformed as sales in premium projects remained robust through the COVID period. Projects such as the Sirius Building, Crown Residences at One Barangaroo and Kurraba Residences have all been very well received by the owner-occupier market. In turn increasing the demand for property development sites within ‘Blue Ribbon’ areas that can provide premium owner occupier product as opposed to predominantly run-of-the-mill investor grade stock.”

Mr Cox said his team is still experiencing significant interest from well-established local Asian developers with strong offshore backing for sites in excess of $50m that can provide scale and access to rail networks.

“Looking ahead to 2021, there are a significant number of sites already signed up and set to hit the market towards the beginning of 2021, with site values ranging from $10m to over $100m, located across of Sydney. We anticipate 2021 being our biggest year on record as the residential market is set to bounce in a very positive direction, “Get ready to invest again into some very well placed units”.

Mr Cox said, “A large number of well positioned Private and Government assets are set to be sold in 2021 as the long-awaited return of the pre-sale market brings new confidence to developers with their eye on the 2-5 year horizon.”

RESIDENTIAL

Chris Orr, Director, Residential at Savills Australia said this year has been a rollercoaster for residential values; from January onward the market began to rally off the back of some political and financial certainty in Q3/Q4 2019. This ended abruptly at the beginning of lockdowns as we saw prices decline seemingly 10-15% overnight.

“Once restrictions were lifted, buyer sentiment and demand returned to near pre-lockdown levels while the number of properties on the market remained considerably less than comparable months in previous years.

“Low stock levels meant that there was a shift in the supply/demand dynamic which is now weighted toward larger dwellings as buyers’ value usable space more than ever.

“With stronger demand per property, some local markets saw houses sell for record highs towards the end of 2020, surpassing previous peaks set in 2017. The apartment market has not been as lucky due to other external factors that appear to have stagnated prices however for the most part, this segment of the market has remained stable since restrictions were eased.  

“Over the year we also saw a sharp decline in rents which has meant less investors were actively looking at residential property due to lower yields. What we are now seeing is a steady return of investors to the market due to the poor performance of cash so while yields may have declined, the net position of many investors remains relative due to lower borrowing costs.  

Mr Orr said next year the following changes are proposed to take place which will have significant impact on the local residential property market:

1. Changes to the National Consumer Credit Protection Act - 1 March 2021
   While it won't quite be like the old days when you would walk into a bank and walk out with a loan approval, one of the legislative frameworks that banks work within and are held to account will be eased. This is proposed to shift the balance of responsible lending from lender back to consumer which will have interesting effects, one of which we will likely see is an increase in borrowing in affordable markets where access to credit has previously not been possible or too expensive. Is a bubble coming, maybe, all we know for sure is that there will be more money in the market which will likely lead to price growth.
2. COVID-19 Vaccine - First half 2021
   Many industries and local businesses seem to be almost back to normal (apart from distancing measures) so while we are able to live and operate locally without a vaccine, the news is welcomed and will give certainty to businesses and consumers who will be able to forward plan and travel internationally. To give you an understanding of one of the biggest impacts a vaccine will have, International tourism in Australia is a ~50 billion dollar industry that is currently non-operational.
3. Changes to stamp duty in NSW - Second half 2021
   The formula of how the new duty will be accrued is yet to be determined and this will impact the feasibility of a more transactional property market, however the reform in principle has been welcomed by both potential buyers and sellers. As always, time will tell, however we expect to see this enable the business of real estate manage cashflow better (developers, investors etc.) which will create additional activity and subsequently increase prices with competition.

“Overall, in 2021 it will be a good year to own residential property, I expect the detached dwelling market to continue to outperform others in inner suburbs while we will likely see a renaissance in off-the-plan sales as investors and first home buyers begin competing for the same stock, leaving a hole in the market and pushing up prices making currently held development sites more feasible.

RETAIL INVESTMENTS

Freestanding supermarket and liquor stores have for many years been the darling of the retail investment sector and this trend continues.

The recent sale of Woolworths Orange is further evidence that retail remains ripe for private investor investment, transacting for $19.5 million at a yield of 5.6%.

According to Steven Lerche, National Director, Retail Investments at Savills Australia “This asset class remains a highly sought after sector of the Australian market with groups bulking up on freestanding and neighbourhood centres, fulfilling ‘Essential Services’ and ‘Daily Needs.’ In the last three years, some 38 freestanding Coles and Woolworths supermarkets have sold with only three of those selling in 2020.

“This sale reaffirms that non-discretionary retail continues to ‘hit the spot’ and other sales this year have been in the regional towns of Lithgow and Wadalba on the Central Coast. “Freestanding supermarket yields over this three year period have ranged between 2.57% to 6.25% and the average is tightening due to the willingness to accept lower returns.

“Despite the effect of COVID -19 across the country, strong NSW regional towns such as Orange, Dubbo, Wagga, Tamworth, Bathurst have all prospered and will further benefit from local tourism whilst international borders are shut. “Investor demand for this sector is due to historical low interest rates and of course: Non-discretionary, Security of income, Flight to quality and Ease of management.”

Mr Lerche went on to say it is expected this trend is likely to continue into 2021 with groups eagerly looking for bond style long term security and cash flow. And globally, supermarket trading performance has been strong through the COVID-19 pandemic.

With the listed grocers both looking for more new stores, we also have Harris Farm setting their sights on a nationwide expansion and opening a 4,450sq m store in Albury, a larger footprint than most of their competitors. Queensland and ACT are understood to be on the radar.

Two more freestanding supermarkets are currently on the market - Woolworths Torquay and Coffs Harbour and are likely to transact soon.

RETAIL LEASING - TENANT REPRESENTATION

2020 has been a year in which the underlying structural headwinds confronting the industry were bought into stark relief. The evaporation of retail sales as a result of COVID induced movement restrictions had a profound negative impact on the market, notably on discretionary spending.

The Government mandated coded of conduct proved to be a reasonably suitable tool to regulate behaviour of Landlord and Tenants during this period albeit a relatively blunt instrument. However, it is inevitable that as such measures taper in 2021 there will be the inevitable rounds of retailer insolvencies and corporate restructures, not to mention mediation of a substantial backlog of disputes.

According to Leighton Hunziker, Director - Retail Services at Savills Australia, the shift to online sales rocketed, with some analysts reporting that the online growth was equivalent to 4 years of historic growth.

“Whilst a lot of these sales are expected to revert back to traditional retail stores, it is inevitable that some of this spending will remain sticky to online channels, and this will put continued downward pressure on rents overall.

At the time of writing, fresh food, athleisure, home goods and electrical are performing strongly, whilst apparel retailing and general discretionary spending remain subdued.

“In terms of performance, suburban centres have generally recovered well, particularly smaller neighbourhood centres which proved resilient throughout pandemic period due to their strong reliance on everyday grocery and convenience.

“CBD’s however are very severely impacted, as a function of lack of tourism and the absence of CBD workers. It is anticipated that CBD’s will be impacted for a sustained period as the attraction of working from home will inevitably mean less people in the CBD over the short to medium term.

“2021 overall should be a brighter year. Pandemic driven economics will pass, and Vaccine promise will lead to greater consumer confidence which will stabilise sales. The market will start to stabilise to a new (albeit lower and sustainable) rental level, and the decay and drama of 2020 will be seen as the start of a period of recalibration for both Landlords and Tenants, a time when communications improved, and where trust was either cemented or destroyed.

“Good retail always adapts to the circumstances, and this fundamental remains true” he said.

OCCUPIER SERVICES - OFFICE

“It’s been a year of much indecision for occupiers”, said Kath Moss, State Director – NSW Occupier Services at Savills Australia “and the full extent of the impact of the new ‘flexible working’ practices is yet to be seen.”

Few large commitments have been made by corporates this year, leaving many guessing as to what today’s real pricing is. There have been some signs of compression in the face rents, albeit at significantly varying levels across the different grades of building. Incentives have pushed significantly north of 30%, and most deals done in the last six months have come with a complex package of extensive access periods, rebates, capital contributions, fit-outs, and hand back rights.

“The fall in COVID-19 case numbers and recent news of vaccinations coming early next year, has brought back some confidence in to the market, resulting in a significant upswing in demand from occupiers to resolve their real estate issues that had previously been put on the back burner. The appetite for fitted space among the small to medium organisations has been the biggest change in the occupier market, disrupting many landlord leasing campaigns, and leading to a rise of speculatively fitted tenancies. We expect this to continue.”

“Sublease space is still flooding on to the market, and we anticipate more coming early next year, as the ‘working from home’ phenomena continues.”

Occupiers of all sizes have been engaging with their workforce in a meaningful way, seeking to determine how often their staff are likely to be working from the designated office. Occupiers are looking to retain or implement desk sharing policies and capitalise on the reduced spatial requirement, whilst keeping a close eye on the impact on corporate culture, collaboration and learning opportunities.

“It’s going to be a fine balance, but the lure of occupancy savings is great. We anticipate seeing occupiers continue the flight to quality and amenity next year, giving their staff a reason to leave the home office, whilst providing ‘healthy’ environments with touchless systems” she said.