The year that was and expectations for NSW in 2018

December 14, 2017 – Sydney’s property market remains the national front winner with unprecedented investment in infrastructure and development across most sectors.

According to Savills Research, Sydney’s standout performance is fundamentally underpinned by a material restriction on development potential owing to the landlocked nature of the CBD.

As such, the investment outlook for Sydney is largely dictated by the supply side into the short term, which is severely constrained as further withdrawals for government infrastructure projects and upcoming developments proceed. This geographic supply hindrance provides the market with lower supply-led downside risk, continues to attract both local and offshore investment, drives rental growth, and justifies tighter return hurdles. This environment has resulted in continued yield compression.

The strong local and off-shore investment demand is expected to continue for all assets due to the potential to unlock positive rental reversion, secure a trophy asset in a transparent market.

Savills Research anticipate continued rental growth as tight leasing market conditions drive benchmarks further through to 2019-21. While significant supply will enter the market beyond 2021 whether it is adequate to satisfy tenancy demand for a city where the sector-weighted five year employment forecast is well above 1 percent per year and further development is restricted due to land locked nature of the CBD means we are less concerned.

Below, Savills market leaders break down key property sectors and look at the year that was and the forecast for 2018:

Capital Transactions

According to Ian Hetherington, Savills National Head, Capital Transactions, 2017 was a Win: Win year for vendors and purchasers.

“Vendors were able to take money of the table at strong levels and purchasers with quality asset management strategies were able to take advantage of the world’s strongest leasing market”.

Savills Cap Trans has been involved in more than $4bn in major transactions over the past 12 months and expect similar levels in 2018.

“We expect the market to remain very liquid. New capital will continue to emerge particularly from Hong Kong and Japan and pricing will be driven by strong rent growth and competition for assets” said Mr Hetherington.

Metro and Regional Sales

According to Robert Lowe, Savills, Director of Metropolitan & Regional Sales, “Investment stock is still considered hot property for well leased retail/commercial properties. This includes single tenant properties through to properties with multiple tenancies and well located properties.

“Record yields are still being achieved. For example 168 Willoughby Road, Crows Nest, sold for $16.25m, on a 4.49 per cent yield, with a Weighted Average Lease Expiry (WALE) of 1.95 years, for three separate tenancies”.

Mr Lowe went on to say that investment stock from $2m up is highly sought after, while developers prefer DA approved properties and will still pay strong prices for well-located properties. A recent example is 54-62 Railway Street Corrimal, which has DA approved for 60 units plus six villa homes, and sold for $9.2m, $139,400 per site.

“Properties with some holding income continue to be sought after, looking at the next development cycle. Traditional areas including the Inner West, North Shore, Northern Beaches, Eastern Suburbs, City fringe are all preferred areas. Some areas in Western Sydney appear to be over supplied.

“The forecast for 2018 depends on interest rates, however funding is still tight for residential development sites, and the market should tighten. However as mentioned, strong prices are still being achieved.

“Investment yields will remain low for retail/commercial properties, rents in commercial areas of North Sydney, Crows Nest, St Leonards, will increase as vacancies reduce due to reduction of stock by way of commercial buildings being redeveloped into residential. Therefore there will be a significant growth in price due to rental increases even though yields will remain the same as 2017. Investment stock will be hard to obtain, as most parties are saying ‘I don’t want to sell as I can’t buy anything’” said Mr Lowe.

Residential Site Sales

2017 was an exceptional year for Savills NSW Residential Site Sales Division with over $400m worth of sites sold, predominantly within a 12km radius of the Sydney CBD. Savills Residential Site Sales Team undertook the largest collective sale ever achieved within NSW, noting that sites situated within close proximity to rail, retail amenity and educational facilities continue to do well, especially within that 12km radius.

According to Stuart Cox, Savills Director of Residential Site Sales, the standout areas with increasing demand for sites predominantly comprise the Lower and Upper North Shore, Inner West and Eastern Suburbs.

“There is still a complete lack of available sites available within the Northern Beaches capable of providing scale. Hot suburbs with immense interest from offshore capital include Macquarie Park, Burwood, Strathfield, Chatswood and the Sydney CBD.

“There is increasing demand for sites that can provide premium owner occupier product as opposed to predominantly run of the mill investor grade product. With a significant shift away from developers wanting to acquire high density residential sites within Box Hill and Rouse Hill with slow presales, bank lending criteria and lack of infrastructure to blame.

Mr Cox said his team is still experiencing significant interest from large, well established offshore developers for sites in excess of $100m that can provide scale and access to rail networks. There is also increasing demand for B Grade Commercial buildings capable of being converted to residential apartments with developers paying tight yields for these well located assets.

Looking ahead to 2018, there are a significant number of sites already signed up and set to hit the market towards the beginning of 2018 with site values ranging from $10m to over $150m, all located within prime areas of Sydney.

Mr Cox said “Large number of well positioned Government assets are set to be sold within 2018 to fund the construction of much need social housing within Sydney.

“We expect many private residential home owners to come together to create large collective sales to reap the rewards of the rezoning brought about by the Parramatta Road Transformation Strategy.

“We expect to see increasing demand for high end premium apartment developments where ‘off the plan’ purchases are not affected by bank funding. As well as significant demand for house and land package sites and townhouse sites. ‘Off the plan’ sales for investor style apartments in Western suburb regions is still expected to be slow throughout 2018. But we expect a strong year of residential site sales within 2018” Mr Cox continued.

Office Leasing

According to Alastair Dunlop, Director of Office Leasing, 2017 set a new benchmark record rent of approximately $1,800/sqm gross which was achieved in the premium sector at Gateway in Sydney’s CBD.

“The scarcity of suites under 200sqm was prevalent as suites in this size bracket are achieving incentives in the range of 10 – 15% resulting in landlords requiring five year terms to cover fit outs. Following this, second hand fit outs are highly desirable to bring overall occupancy cost down.

The Co-Working sector continues to grow at a rapid pace with a steady supply of new entrants both locally and offshore. WeWork dominates the CoWorking race with new entrants such as Naked Hub, SPACES, Hub Australia and The Great Room scrambling for market share.

Tenant displacement caused by stock being redeveloped or undergoing a change of use continues with the likes of AMP’s 50 Bridge Street and the Young and Loftus buildings decanting to make way for demolition in Q1 2018. This has led to a flurry of transactions as these tenants seek new premises.

Strong rental growth was seen over the 2017 year and Barangaroo now has approximately 9% vacancy remaining across the Three International Towers.

2018 and Beyond

“We enter a period of low supply with Investa’s Barrack Place – 151 Clarence Street being the only new build marked for delivery in 2018.  Looking further to 2019 and 2020 we anticipate there will be approximately 120,000sqm being delivered across the CBD Prime market.

“55 Market Street, 320 Pitt and 388 George Street will come back to the market in a refurbished state offering approximately 80,000sqm of new supply in 2019/2020.

Strong rental growth is anticipated up to 2021 at which point major supply will start to enter the market and rental growth is likely to normalise.

“We anticipate supply additions of 270,000sqm between 2018 – 2020 coupled with approximately 90,000sqm of withdrawals” said Mr Dunlop.

Residential Project Marketing

According to Ged Rockliff, Savills Head of Residential, tighter lending restrictions have had a material impact on both local and offshore purchasers. The increases in stamp duty and restrictions on withdrawing funds from China have also softened demand.

“We believe a number of projects with approval will be delayed as achieving financial covenants (i.e., pre sales) will take longer. Whilst volume of sales are down, values have held and the Sydney market is being supported by an unprecedented investment in infrastructure.

“Sales in blue chip located projects with a bias to the owner occupier/downsizer market will continue to perform well. The housing market has started to normalise as the number of listings have grown with a subsequent decline in auction clearance rates.

According to Sophie Chick, Savills Head of Residential Research, 2017 has been a year of two halves for residential property in Sydney. The year started with an extremely buoyant market driven by high demand, particularly from an increase in investor buyers, and a lack of supply.

“However, the market slowed over winter as sentiment weakened following two significant changes. In March, APRA restricted interest only loans to 30% of new lending and in July the stamp duty for overseas buyers was increased from 4% to 8%.

“The market found a new level over Spring. Despite lower auction clearance rates and properties taking longer to sell, the market is active with appropriately priced stock selling well.

2018 and Beyond

Ms Chick went on to say that the demand drivers for residential property remain strong for Sydney. The population is forecast to continue increasing, infrastructure projects are boosting the economy and opening new areas of Sydney for residential development and interest rates are still low.

“On the supply side, residential development activity has begun to slow. Building approvals have been falling since mid-2016 and commencements and completions have followed suit.

“Growth rates plateaued over 2017 and we expect prices to remain on this ‘high plateau’ in 2018. However, if the development activity continues to slow, the ongoing supply and demand imbalance will continue which is likely to cause prices to increase again over the medium term.


Sandra Peachey, Savills National Head – Valuation & Advisory said the residential apartment market has reached its peak with a decline in sales volumes. There has not been any indication of price reduction in good solid inner and middle ring locations, however the outer ring is likely to see some correction.

“It is expected that the majority of pricing will remain on this plateau for some time. Supply levels of built apartments and apartments in the pipeline in some locations such as Epping and Mascot have reached concerning levels. But the CBD apartment market is returning strong results.

Ms Peachley said “Concerns with settlement risk have not really come to fruition, however this is likely to increase for developments settling in late 2018/2019

“The market for residential allotments remains strong with high levels of demand in the north west, producing slightly higher pricing than the south west release area. Most allotments are still selling off plan with no price reduction evident to date.

“Site values for both built form and englobo are holding, however the volume of approved sites entering the market has increased” she continued.

Student Accommodation

Conal Newland, Savills Director of Student Accommodation, said the Australian Student Accommodation Market was very much focused on development of new accommodation throughout 2017, with Savills research indicating a total pipeline of just over 25,000 beds across the main metropolitan areas.

“In 2018, over 9,000 new bedrooms of student accommodation will be delivered in Sydney, Brisbane and Melbourne.

“Initial indications from the early stages of the 2018 letting cycle is of robust demand for accommodation, which has been underpinned by strong growth in international student numbers.

“The demand and uptake for new top end accommodation in Brisbane and Melbourne will be closely monitored by the market in 2018.

“The disruption of Brexit is expected to impact on the UK Higher Education market, with some potential for more students to choose study in Australia” he said.

Retail Investments

According to Steven Lerche, Savills National Director of Retail Investments, 2017 saw the retail property market fueled by low interest rates, rapid population growth and large volumes of foreign capital.

“Market conditions remained strong across all sectors but the biggest winners have been the non-discretionary neighbourhood centres and freestanding supermarkets – both of which, have been hotly contested.

The biggest losers include sub regional centres particularly in regional locations that have come under the highest scrutiny with the future of DDS stores being put under pressure by the likely Amazon, which has been damaging to investor confidence.

Mr Lerche said most active investors are onshore REIT’s, Funds, syndicates and private. Offshore Chinese investment has been patchy but they have target well located (next to train stations) redevelopment opportunities allowing for integrated living, shopping and entertaining.

“Large format retail has remained an active sector with yields falling sharply as investors have been keen to secure such assets.”

Mr Lerche said despite retail spending shifting, we expect investment sales volumes in 2018 to remain steady.

“Yields will remain tight due to the continued historically low interest rates and the private sector is likely to continue to cash out at what they believe to be the top of the market.

“In 2018, we could see an increase of supply softening in the market due to a thinner buyer pool. Sydney will remain the defensive location with population growth fueling investment demand” said Mr Lerche.


Looking ahead, Darren Curry, Savills Director of Industrial & Business Services, said when it comes to Industrial rental growth for 2018, “Vendors should expect an increase in face rents across broader Western Sydney. As existing and speculative ‘prime’ industrial buildings will be in limited supply, owners should be able to capture higher face rents with reduced incentive levels.

“Yields for ‘Super Prime’ will remain steady at 5.5% for ‘logistics grade’ buildings with A grade covenants on long term lease structures.

“Demand for well located, zoned industrial sites will be competitively sought after in the upcoming year.  As 2016/2017 saw growth of up to 40% in value within some industrial precincts, these values should now remain steady in 2018.

Mr Curry went on to say that pre lease markets – Supply Chain & advances in technology will drive pre lease enquiry in 2018. As companies try to improve margins and their EBIT, opportunities such as the Moorebank Intermodal Logistics Park will continue to capture significant interest from the Corporate Industrial heavyweights.