RESEARCH

SYDNEY CBD OFFICE & HOTEL INSIGHT OCTOBER 2015

Key Facts

Of the Sydney CBD office stock

which has traded since

January 2010, 47% (by NLA)

has been to offshore groups

100% of Sydney CBD hotel

rooms (4 & 5 star) which have

sold since January 2010 have

been to offshore groups

Offshore groups currently

own 88% of the Sydney CBD

hotel room stock (4 & 5 star),

up from 69% in January 2010

Offshore groups directly own

30.2% of Sydney CBD office

stock by value, up from 16.2%

in January 2010

Ownership of both Sydney CBD office and hotel assets has well and truly gone global as Asia’s growing appetite for Sydney CBD property coincides with continued demand from mainstay investor locations such as North America.

Overview

Investment into Sydney CBD office and hotel

assets by offshore groups has grown

considerably over the past five years,

boosted by relatively higher yields and more

recently by currency depreciation. To

measure the impact, Knight Frank has

assessed the ownership of investment grade

stock in the Sydney CBD office and hotel

sectors as at September 2015, compared

against January 2010. The globalisation

thesis is clear-cut with offshore ownership of

CBD office and hotel assets increasing

significantly.

So far in 2015, Sydney CBD office sales

($10m+) have totalled to $4.93 billion, which

is already above the historical high recorded

in 2014. Of this amount, 60% has been to

offshore groups, which compares to just

18% in 2010. Similarly, the purchaser profile

of Sydney CBD hotels continues to be

dominated by offshore groups, with 100% of

2015 purchases being made by foreign

groups, namely from Asia.

Sydney is seen as an attractive investment

proposition to offshore groups given our

perceived less risky operating environment

with greater market transparency, stable

economic and political environment and

favourable yield metrics.

While direct offshore office ownership in

2010 was controlled largely by groups from

North America, an emerging trend in recent

years has been the growing presence of

Asian investors, particularly from China,

Hong Kong and Singapore. China’s share of

office stock alone has jumped 12-fold since

January 2010. While local funds, both listed

and unlisted remain the largest owners in

the Sydney CBD office market, portfolio re-

balancing and capital management

initiatives have resulted in local groups being

net sellers since January 2010 with their

proportion of ownership reducing

significantly.

Alternatively, while ownership in the hotel

sector has historically had a large proportion

of foreign owned stock, the share has risen

substantially over the past five years, again

the result of robust demand from Asia.

MATT WHITBY Group Director, Head of Research

& Consulting

Follow @ KnightFrankAu

2

FIGURE 1

Sydney CBD Office Offshore

Ownership Total Value & SQ.M by Grade, Jan 10 to Sept 15

Source: Knight Frank Research *YTD to September

SYDNEY CBD OFFICE

0

200

400

600

800

1,000

1,200

1,400

$0

$2

$4

$6

$8

$10

$12

$14

$16

2010 2011 2012 2013 2014 2015*

PRIME VALUE

SECONDARY VALUE

TOTAL SQM (RHS)

Billions '000s

FIGURE 2

Sydney CBD Office Ownership by

Value (Offshore) & SQ.M (Aust^) Selected Country/Region, Jan 10 to Sept 15

Source: Knight Frank Research *YTD to September ^Australian Institutional

FIGURE 3

Sydney CBD Office Development

Pipeline By Ownership Type, 2015-2020+

Source: Knight Frank Research Note: Excludes refurbishment/backfill space

In the office sector, the assessed market

value of Knight Frank’s Sydney CBD

investment grade database at September

2015 was $51.9 billion, covering 4.37

million sq.m (88% sample size vs PCA

figures). Since January 2010, both

domestic and offshore investors have

been increasingly active in the Sydney

CBD with transactions over the period

totalling just under $20 billion. Of this

amount, 52% by value was sold to

offshore groups. With heightened

amounts of foreign capital remaining in

the market, investment volumes are

currently at peak levels with YTD 2015

(September) transactions measuring

$4.93 billion.

Over the past five and a half years,

approximately 1.89 million sq.m of office

stock has traded (44% of the Knight

Frank database), of which just over

888,000 sq.m (or 47% of stock sold by

area) has transferred to offshore groups.

While prime grade stock has constituted

the majority of offshore purchases at 58%

by NLA (propelled by recent prime grade

sales), there has been a significant jump

in secondary grade stock acquisitions by

offshore groups. The driver of this has

been demand for secondary assets in

prime locations with re-development/

change of use potential, with major

examples including 1 Alfred St & 31 Pitt

St (Dalian Wanda), 175 Liverpool St

(Shimao) and 338 Pitt St & 233

Castlereagh St (Visionary).

Blackstone (US) and Ivanhoe Cambridge

(Canada) for a 25% share of 161

Castlereagh Street (Liberty Place) in late

2014.

Since January 2010, Greater China

(China & Hong Kong) has seen the

strongest rate of growth, up 12-fold to

$4.47 billion (see Figure 2). This result

was strengthened by the recent Investa

portfolio transaction to China Investment

Corporation (CIC) where the Chinese

sovereign wealth fund acquired just

under 135,000 sq.m of office NLA within

the Sydney CBD. This included a 25%

share in 225 George Street, 50% share at

400 George Street and a 26% share at

126 Phillip Street amongst others.

The growth of offshore ownership since

2010 has been assisted by portfolio re-

balancing and capital management

initiatives from local listed and unlisted

groups which has resulted in them being

net sellers over the period. Instead, local

groups have become more active via

capital partnering with large offshore

funds and development of new stock

(e.g. Mirvac at 200 George Street).

Offshore groups own a large share of

Sydney’s development pipeline,

accounting for 31% of future office stock

(see Figure 3), underpinned by the

additional stages of Barangaroo (T1-

Qatar Investment Authority, 37.5% & T3 -

CPPIB, 50%) and Ten Carrington

(Brookfield) - see Figure 3.

While local groups remain the biggest

landlords, 1.35 million sq.m (or 30.8% by

area) of the Sydney CBD office stock is

owned directly by offshore groups either

wholly or in part, translating to a value of

$15.64 billion. Since 2010, direct offshore

ownership of office stock has more than

doubled from just under 630,000 sq.m

and increased by 203% in value terms. In

comparison, domestic institutional

ownership has shrunk by 6% to 2.42

million sq.m since January 2010. If

indirect offshore ownership through

capital partnering initiatives, investment

into platforms and listed securities was

included in this analysis, the proportion of

foreign owned stock would be materially

higher.

Following the recent completion of

Barangaroo Tower II and the Canadian

Pension Plan Investment Board’s (CPPIB)

50% share (bought in 2012), Canada has

overtaken Singapore as the largest owner

by value by country with a market value of

$3.57 billion. Of note, the bulk of

Canadian office purchasers have been for

prime trophy assets with 91% of stock by

value (or 86% of office NLA) being

confined to the prime market.

In conjunction with the US, North America

has increased its ownership from $2.00

billion in January 2010 to its current value

of $5.09 billion. Notably, the majority of

this increase stemmed from acquisitions

which occurred over the past 18 months

including the joint venture between

0

50,000

100,000

150,000

200,000

250,000

300,000

2015 2016 2017 2018+ 2019+ 2020+

A-REIT GOVERNMENT

OFFSHORE PRIVATE

SUPER FUND UNLISTED/SYNDICATE

0

500

1,000

1,500

2,000

2,500

3,000

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

2010 2011 2012 2013 2014 2015*

GREATER CHINA

SINGAPORE

NORTH AMERICA

AUSTRALIAN INSTITUTIONS (RHS-SQM)

Millions '000s

3

RESEARCH OFFICE & HOTEL INSIGHT— SYDNEY CBD

Park to Sunshine Insurance Group from

China.

While groups from Asia have historically

been the most active players in the

Sydney CBD hotel market, owning 51%

of the room stock in January 2010,

demand from Asia has ramped up

considerably in recent years, where they

currently own 77% of all rooms. It has

been the emergence of China over this

period which has propelled this

proportion.

Since January 2010, Chinese/Hong Kong

ownership has increased from effectively

zero to almost 2,000 rooms or 18.4%, the

majority of which has occurred over the

past two years (see Figure 6).

Interestingly but not surprisingly, the bulk

of Chinese/Hong Kong acquisitions to

date have been for the ‘trophy’ hotel

assets which is in contrast to the office

market where they have been actively

pursuing secondary stock, particularly

those with change of use opportunities.

Notwithstanding a slight decrease over

the period, Singapore remains the largest

owner by country, with just over 3,000

rooms or 29% of total room stock (down

from 32.1% in January 2010). However,

with Singapore’s Pontiac Land Group

acquiring the 99 year lease of Sydney’s

Sandstone buildings at 23 and 35 Bridge

Street, their ownership of Sydney CBD

hotel rooms will increase once the circa

240 luxury hotel rooms are developed.

In line with record tourist numbers from

Asia and in particular China, foreign

investment into the Sydney CBD hotel

sector (4 & 5 star) has enjoyed similar

momentum with room ownership by

foreign groups currently at peak levels.

Brought about by healthy occupancy

rates, increased room revenues and a

positive outlook, offshore demand for

Sydney CBD hotels has been robust in

recent years, with the concentration of

foreign ownership significantly higher

than that of the Sydney CBD office

market.

As at January 2010, 69% of the 10,850

rooms in Knight Frank’s 4 & 5 star hotel

database were owned by offshore

groups, the bulk of which (3,482 rooms

or 11 hotels) stemmed from Singapore.

Additionally, domestic institutions owned

31% of Sydney CBD hotel rooms (4 & 5

star) at that point in time.

Fast forward five and a half years and the

proportion of offshore ownership has

jumped to 88%, brought about by the

growing investment appetite from Asia.

Since January 2010, 4,825 rooms (45%

of rooms) have sold, all of which were to

offshore groups. Recent significant sales

($400 million+) have included the Westin

Hotel to Singapore’s Far East

Organisation and Hong Kong's Sino

Group, the Hilton Hotel to Chinese

backed Singaporean investment house

Bright Ruby and the Sheraton on the

The rise in offshore ownership over

recent years has come at the expense of

domestic groups where their proportion

of ownership has diminished rapidly (see

Figure 6). With favourable selling

conditions coupled with an increased

focus on capital management initiatives,

a number of hotels previously owned by

domestic groups have traded since

January 2010 including the likes of the

Four Seasons Hotel (previously owned by

Eureka Funds Management).

Foreign demand for Sydney hotels is not

just confined to the Sydney CBD core

with those located in the fringe also being

subjected to strong demand. In recent

years this has included the acquisitions of

Blue Sydney (Woolloomooloo) to Hong

Kong’s Ovolo Group and the purchase of

the Larmont Sydney (formally the

Diamant Hotel) by a joint venture between

Singaporean and domestic funds.

Looking ahead, the high concentration of

offshore ownership is expected to

remain, however with the majority of

Sydney’s 5 star trophy assets trading

over the past two years, it is likely that

they will become more tightly held over

the next two to three years. For assets

that do become available, there is

expected to be significant offshore

interest, particularly from China as they

become more accustomed to investing in

Sydney, and tourism demand continues

to drive performance.

SYDNEY CBD HOTELS

FIGURE 4

Sydney CBD Hotel Ownership By Region, Sept 15 (4&5 Star Hotels)

Source: Knight Frank Research

12.1%

77.2%

2.4%

3.4%

4.8%

AUSTRALIA ASIA NORTH AMERICA EUROPE OTHER

FIGURE 5

Change in Sydney CBD Hotel

Ownership By Country, Jan 10 & Sept 15 (4&5 Star Hotels)

Source: Knight Frank Research

FIGURE 6

Sydney CBD Hotel Ownership (%) By Country, Jan 10 - Sept 15 (4&5 Star Hotels)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Jan

-10

Jan

-11

Jan

-12

Jan

-13

Jan

-14

Jan

-15

Cu

rren

t

CHINA/HONG KONG AUSTRALIA SINGAPORE OTHER OFFSHORE

Source: Knight Frank Research

Australia

China

Hong Kong

Malaysia

Singapore

US

Thailand

Other

0

500

1,000

1,500

2,000

2,500

3,000

3,500

0 1,000 2,000 3,000 4,000

20

15 O

wn

ers

hip

by N

um

be

r o

f R

oo

ms

2010 Ownership by Number of Rooms

RECENT MARKET-LEADING RESEARCH PUBLICATIONS

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Sydney Residential

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Asia Pacific Capital

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Knight Frank Research Reports are available at KnightFrank.com.au/Research

Sydney CBD Office

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September 2015

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COMMERCIAL BRIEFING

RESEARCH

Matt Whitby

Group Director

Head of Research & Consultancy

+61 2 9036 6616

Matt.whitby@au.knightfrank.com

Nick Hoskins

Director – NSW Research

+61 2 9036 6766

Nick.hoskins@au.knightfrank.com

Luke Crawford

Senior Research Analyst

+61 2 9036 6629

Luke.crawford@au.knightfrank.com

CAPITAL MARKETS

James Parry

Head of Institutional Sales, Australia

+61 2 9036 6758

James.parry@au.knightfrank.com

John Bowie Wilson

Head of Commercial Sales, NSW

+61 2 9036 6743

John.bowiewilson@au.knightfrank.com

Dominic Ong

Senior Director, Head of Asian Markets

+61 2 9036 6747

Dominic.ong@au.knightfrank.com

VALUATIONS

David Castles

National Director

+61 2 9036 6648

David.castles@au.knightfrank.com

Alistair Bell

Director, Hotels & Leisure

+61 2 9036 6763

Alistair.bell@au.knightfrank.com

Outlook For the office sector, with limited

buying opportunities expected in the

prime market, the majority of

transactions over the next 12-24

months are expected to stem from

investors targeting non-core or value-

add assets. With offshore groups

showing an increased appetite for

secondary assets with development/

change of use potential, accounting

for 54% of secondary stock

acquisitions since January 2010 (by

NLA), they are expected to remain the

dominant players in the market.

For the hotel market, investment

volumes are expected to ease as the

majority of Sydney CBD 5 star trophy

assets have sold over the past two

years. With this in mind, offshore

investors are likely to become more

aggressive in their approach to secure

hotel assets while it is likely they will

seek investment opportunities in

metropolitan and regional markets.

With the inflow of Chinese investment

only gaining sizeable momentum over

the past 18 months, they are expected

to become a more dominant force on

both office and hotel ownership over

the coming years as they become

more accustomed to investing in

Sydney.

Increasing fractionisation of ownership

is expected to become a greater

feature going forward as offshore

groups seek joint ventures with

domestic institutions to gain exposure

to assets and local knowledge.

Methodology:

This analysis collects and tabulates data based on direct ownership of specific assets. The analysis does

not specifically include additional offshore capital that may have been invested indirectly via capital

partnering initiatives, investment into platforms and listed securities. A recent example of this is the

DEXUS and CPPIB acquisition of the Commonwealth Property Office Fund (CPA).

Asset acquisitions are only included in the database at project completion eg Barangaroo Tower 2.

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