Small offices on the up

Demand for smaller-sized offices has been in the ascendancy to cater for the growth in consultant agencies, smaller legal practices and IT and advisory businesses across all cities in Australia.

In the past this has been the domain of the leasing market. But with lower interest rates, there is tipped to be an increase in buying activity from high net worth investors and self-managed super funds.

The natural extension of this trend will be a flow-through in demand for strata properties.

This is divided between investors buying and leasing the sites or being the owner-occupiers.

DEXUS Funds Management chief executive Darren Steinberg said on Monday there was evidence that demand for smaller office spaces was rising, based on leasing and sales transactions.

"While the office market for the larger contiguous space is dominated by the developments around Sydney's city fringe, such as Barangaroo, our team has completed 63 leasing deals of space of less than 100 square metres," Mr Steinberg said.

"The demand for the space comes from law firms, accountants, IT and recruitment consultants. We expect this trend to continue."

In its latest report on the strata market, the researchers at Knight Frank said sales volumes, which they completed in the 2012 calendar year, were 45 per cent higher or equal to $136.5 million, compared with 2011.

The report added that capital values also showed a limited increase of 1.7 per cent to a current total market average of $5122 a square metre.

Knight Frank executive of city sales Andrew Palmer said there had been a significant increase in the volume of sales experienced in Sydney strata offices, specifically among owner-occupiers across the past calendar year despite a tightening and slowdown in the delivery of new quality stock to the local market.

"In particular, the city core precinct attracted strong interest with average capital values increasing by 15.6 per cent on 2011 figures," Mr Palmer said.

"Predominantly the key factors for driving this significant increase in sales in 2012 are improved investor sentiment and the cost of debt continuing to fall with the cash rate now at its lowest level over 50 years. In 2012, we entered into a perceived low point of the property cycle with interest rates dropping and confidence returning in the market."

The Sydney core continued to be the most expensive precinct at $5832 a square metre followed by the western corridor and the midtown precincts, which averaged $4999 a square metre and $4979 a square metre, respectively.

The southern precinct averaged more in total volume than it had in each of the previous 11 years driven by increased overseas investment.

"This sharp spike in sales can also be attributed to the change which took place 18 months ago in self-managed super funds [SMSFs]," Mr Palmer said. "Investors began taking advantage of favourable tax benefits on offer with much of this increased activity during 2012 generated by SMSFs and this ... pushed prices steeply up in the core precinct.

"There has also been noticeable change in buyer interest from sub-100-square-metre office spaces, which accounted for almost three-quarters of all sales in 2011 to a strong movement back to larger office spaces.

"This is indicative of Australian business downsizing post-GFC and ... becoming more confident and beginning to expand again in 2012."

The executive of investment sales and leasing in Knight Frank's Asian markets division, Andy Hu, said the buyers, particularly in the Sydney-city southern precinct, experienced a sharp increase in interest from Asian buyers, primarily owner occupiers, with the number of sales more than double compared with 2011.

Savills NSW research director Simon Hemphill said there were a number of backfill floors available in the Sydney city-centre market and this is expected to decline once the protracted negotiations now taking place are complete.