What next for Chatswood’s office market?June 5, 2015 / By
“When the facts change, I change my mind. What do you do, sir?” John Maynard Keynes is reputed to have asked. It’s a good question, and one that investors and tenants are now posing about the Sydney north shore office market.
The Sydney north shore office market comprises three sub-markets: Chatswood, St Leonards and North Sydney. Investment returns between the three sub-markets have been highly correlated. JLL Research calculates the correlation between the Chatswood and North Sydney total return index (capital return plus rental income) to be greater than 0.95 over 5, 10 and 20 year periods. But, high correlation does not mean identical performance. As the Figure shows, the Chatswood market has been a serial under-performer relative to North Sydney.
Source: JLL Research
This may be about to change. One reason is infrastructure investment.
Construction of the first fully-automated rapid transit rail system in Australia will see Chatswood benefit from the North West Growth Centre (NWGC). Over the coming decades, an extra 200,000 people are expected to move into the NWGC.
NSW Bureau of Transport Statistics shows that more than 60% of workers working within the Chatswood precinct reside on Sydney’s north shore. The Chatswood commercial precinct is located within a 200m radius of the Chatswood train station, and will be a destination for workers commuting from the NWGC.
For investors seeking to increase their exposure to the Sydney north shore office market, Chatswood is a sub-market worthy of consideration:
Yield Spread – Investors are increasingly attracted to suburban markets in the global hunt for yield. The average yield for prime grade office stock in Chatswood is currently 113 basis points higher than in North Sydney. The twenty-year average spread is 73 basis points.
Availability of prime grade stock – Chatswood comprises eight out of the 27 A-grade buildings with a net leasable area greater than 10,000 sqm in the North Shore office market. The supply of similar assets is tight with only one asset under construction in North Sydney.
Vacancy tightening – Chatswood total vacancy at 1Q15 (10.9%) was also lower than the vacancy rates for all Australian CBD markets with the exception of Sydney CBD (9.0%) and Melbourne CBD (9.6%).
The attraction of the Chatswood office market extends beyond the physical and financial indicators. Chatswood is a precinct for arts, entertainment, shopping and fashion, and is the largest retail precinct in Sydney outside of the Sydney CBD.
Chatswood is the home to many national and international business headquarters. The tenant base is well diversified. Engineering, IT, telecommunications, construction, professional consulting and insurance companies all choose to headquarter their business in Chatswood’s commercial precinct.
Like investors, prospective tenants are attracted to Chatswood. Rents are affordable. The spread between the 10-year average prime gross effective rent for Chatswood (AUD 329) and North Sydney (AUD 428) is AUD 99.
Unsurprisingly, against this backdrop of structural change and attractive financials, investors and tenants are starting to change their minds about Chatswood. What will you do, sir?
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