Sydney’s Opera House is 40 years old this year. But 25% of Sydney’s CBD office stock is even older. With my recent arrival from New Zealand, I had anticipated a modern CBD office landscape that reflected the largest city in a country that has recorded 21 years of continuous economic growth. However, almost half of the Sydney CBD office stock reflects design characteristics of the 1980’s or earlier. The age profile of Sydney’s stock suggests scope for a major refurbishment cycle. Closer analysis of all these factors presents a clear re position proposition for many of Sydney’s aged office assets.
Generally office buildings require a major refurbishment every 20-25 years to remain competitive. Timing of when to offer the re-positioned asset back to the market is crucial to leasing success. The lifecycle of the building, property cycles and economic conditions are also key aspects to consider to mitigate the future risk profile for any potential asset re-positioning.
Property cycles are a pivotal influence on the timing of any re-positioning project. These include the spread between prime and secondary vacancy rates, rental levels and cap rates. Trends in each of the three metrics can act as a good guide as to when to re-position.
For example, the yield gap between prime and secondary office assets currently sits at a historically wide 225 basis points for the Sydney CBD. This may present opportunities for investors with a higher risk tolerance to enter the market and purchase secondary assets that have vacancy risk already priced in. Applying a thorough refurbishment program and re-positioning the asset to a higher standard, with the ability to realise future rental and capital value growth, is an attraction for ageing secondary assets with short WALE.
With 46% of Sydney office buildings in excess of 30 years, a high proportion of buildings are beginning to reach their anticipated lifespan. In some cases, obsolescence is a reality for office building owners. With the domestic economy expected to grow below-trend over the 13/14 financial year, we believe landlords of office in Sydney should be formulating a strategy to protect the value of their ageing property assets.
We expect that the wide spread between prime and secondary assets is likely to persist over the next few years. The divergence between prime and secondary assets, and the market conditions that currently exist, give a strong case for a re-positioning strategy. If a thorough refurbishment process is undertaken and the product differentiated with an improved lobby, end of trip facilities and services, the building will be competitive with competing properties in the market. By rejuvenating a building owners are able to extend the life of the asset and optimise the building’s investment performance.
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