Checking in on Chatswood

August 27, 2019 / By  

When international capital comes knocking on Sydney’s door, there is typically a limited discussion of office markets outside of the Sydney CBD – a group might ask about North Sydney office market or Parramatta, but that’s usually the extent of it.

So what has heightened offshore interest in the Chatswood office market over the past 18 months?

Of the top five office assets in the Chatswood market by size, three have changed hands since the beginning of 2018, of which two have been acquired by international investors.

The Zenith, 821-841 Pacific Highway, was acquired for AUD 438.2 million by a joint venture between Starwood Capital, a United States private real estate investment firm, and Arrow Capital. Sage Tower, 67 Albert Avenue, was acquired for AUD 158.0 million by Mapletree Investments, a real estate conglomerate based out of Singapore.

So why has this international demand for Chatswood assets surfaced all of a sudden? One part of it is due to the assets in question. Both were undoubtedly two of the strongest A-Grade offices in the market, each with a significant land holding and in close proximity to the Chatswood Metro Station. Both were relatively affordable as well, with Chatswood assets offering value on a rate per sqm and on a cap rate basis.

Figure 1: Capital Values – Chatswood is affordable relative to North Sydney and the CBD
Source: JLL Research

International capital is also willing to pay a premium for markets with positive exposure to public transport infrastructure. Sydney Metro Northwest (Rouse Hill to Chatswood) completed in the first half of 2019 and is the first of three sections of metro rail (Northwest, City and Southwest) to complete.

The new metro will improve accessibility and connectivity to the Chatswood office market, supplementing the existing train network and easing capacity concerns. Over the longer term, the Chatswood to CBD line will have a similar effect on accessibility for the precinct.

Chatswood also has a diverse occupier base and is less exposed to a single sector of the economy. Cost-conscious organisations are attracted to the affordability attributes of Chatswood with average gross effective rents at a 33% discount to North Sydney and 48% to the Sydney CBD.

As a result, take-up over the last ten years has spanned a number of sectors, including construction, information media & telecommunications, professional services and public sector organisations. The appeal of the Chatswood market has resulted in prime vacancy tightening to 2.3% in 2Q19.

Figure 2: Prime Vacancy – Chatswood offers similar physical market conditions to core markets
Source: JLL Research

It’s not just the cost effectiveness though – Chatswood also offers excellent retail amenity via both Chatswood Chase and Westfield Chatswood, both of which bring a wealth of food & beverage, fashion and non-discretionary retail options.

Chatswood has many of the key ingredients offshore capital is seeking from its Australian real estate exposure. The best quality assets will see strong investor demand. The challenge, however, for offshore capital sources is the limited number of prime grade assets in Chatswood.

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