Sydney leads worldwide office rent rankings

Forget London and New York.

Sydney is expected to enjoy the strongest office rental growth of any city in the world over the next three years, according to a new report.

Knight Frank’s annual Global Cities report predicts Sydney will experience prime office rental growth of 27.5% from the fourth quarter of 2015 to the fourth quarter of 2019 – significantly more than any other global gateway city.

Only Berlin (25%) and Austin, Texas (24.9%) come close to matching Sydney’s office boom, with Los Angeles at 15.9%, Tokyo at 10.3% and Paris at 10%.

Tight market: Sydney a world-beater for office yields

London rents are predicted to grow by just 7%, while New York City is expected to fall by 2.5% over the same period.

Cementing Australia’s place as a prime target for overseas capital, Melbourne also figures prominently in the report, coming in fifth on the list with predicted growth of 19.3%.

Brisbane ranked 24th on the list of 31 cities, with growth of 2.7%.

Melbourne offices are also seeing strong rental growth.

Knight Frank’s Australian head of research and consulting Matt Whitby says Australia’s major markets are in a perfect storm for rental growth.

“Sydney, along with Melbourne, continues to see diversified demand drivers, as the Australian economy continues to show resilience despite the slowdown in demand for commodities,” Whitby says.

Rents are going through a period of dramatic growth in Sydney and Melbourne

“In Sydney, off the back of tenant demand – which is double the long-term historical average – and falling vacancy rates, rents have risen sharply across the prime and secondary markets. This is accentuated in the secondary market where large amounts of permanent withdrawals have occured.”

“As a consequence, annual gross effective rental growth of 16.6% has occurred in the secondary market and 13% in the prime market over the 12 months to July 2016. This relatively strong growth is expected to continue, with secondary and prime gross effective rental growth of 9.6% per annum and 7.9% per annum respectively to occur over the next two years.

Brisbane is expected to experience only small gains in its office rental market.

Sydney and Melbourne also performed strongly on JLL’s ‘Skyscraper Index’, which measures rental growth on the upper floors of each city’s tallest buildings.

Sydney ranked second with growth of 6.6% during the first half of 2016, while Melbourne was eighth with a 3% gain.

Knight Frank head of institutional sales James Parry says rental growth is almost certain to lead to further boosts to property prices.

“Rents are going through a period of dramatic growth in Sydney and Melbourne. With the lack of stock and continued strong demand, the stars are aligned for price growth,” Parry says.

“On a global scale, yields remain generous, so Australia is a positive investment offering internationally with yields compressing. Even on an effective yield basis, it’s still very appealing as incentives are contracting.”