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Sydney CBD Offices That Are More Affordable Than Sydney’s Cheapest Houses

Author: Eliza Owen
Source: CoreLogic

As of May, the cheapest 10% of houses in Sydney were valued at up to $604,762. In other words, even the lowest value houses in the greater Sydney metropolitan – from the eastern suburbs to Penrith – are expensive relative to other assets.

Meanwhile, in the heart of the Sydney CBD, over 100 offices sold for under $604,762 in the year to May 2017, Cityscope figures reveal. 

Of these 100 strata unit offices, the prices ranged from $87,000 to $600,000, and averaged $378,360.

The cheapest office sales were in the centre of Sydney’s business activity – Macquarie Street, King Street and Sussex Street. Interestingly, 6 of the 10 cheapest sales came from 368 Sussex Street, a 10 storey building established in 1973. The building is just minutes from Town Hall Station, World Square and a number of restaurants.

The lowest sale value was a room within 229 Macquarie Street. At just 26 m2, the property sold for $87,000 in July last year.

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Small commercial spaces are relatively low in value for several reasons. Firstly, investors in commercial property are highly dependent on rental yield, rather than capital growth – and the initial price reflects these expectations. Whereas the lowest 10th percentile of Sydney houses saw capital growth of 11.4% in the year to May, capital growth in commercial properties is typically more subdued.

Additionally, these spaces are inappropriate for residential re-zoning. High yields in the residential space have caused some commercial property to be valued on its potential to be converted into houses or units. The cheap office spaces recorded as sold over the year in the Sydney CBD are located within high rise office buildings, with an average floor area of 46 m2. The minimum floor space for one bedroom apartments in New South Wales is 50m2.

The value of these properties is also limited because they are strata. In comparison, the cheapest non-strata office property was $4 million. The sale was of a 220 m2 building on a 76 m2 site at 66 Druitt Street, Sydney.

Finally, prospects for growth in office spaces, particularly small ones such as these, are potentially disrupted by increasingly remote workforces. The economies of scale that come from accommodating a workforce in one physical space, is reduced the smaller the company, and the smaller the office space. Emerging small businesses and start-ups may instead find communal office spaces more attractive, where workers can rent by the desk, by the day, and not have to commit to long term leases.

So are these offices a good investment? Given the small size of these office spaces, the per-square-metre price was not cheap. However, like with any investment, it is about paying the right price for the right return. Some of these low value office spaces have good rents. The highest rental yield associated with a transaction over the year was 6.7% on a 51m2 unit sold for $475,000 in Pitt Street. Depending on the terms of the loan for the property, such an investment would likely be positively geared.  

Assuming demand for offices in the Sydney CBD remains driven by strong economic performance, such purchases could present good investment opportunities, at a much lower price than the typical Sydney home.


Eliza Owen
Commercial Research Analyst
CoreLogic

Published: 17 July 2017