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 Landlords set to enjoy Sydney office leasing spread

Office landlords are set for more gains in Sydney rents this year after enjoying up to 75 per cent increases in leasing spreads, drawing a sharp contrast to retail property where such leasing spreads remain in negative territory.

The leasing spread is the gap between how much a shop or office is being rented for now and what it gets rented for when a new lease is struck.

In Sydney a range of landlords are set to benefit because of a tightening in the supply of available office space due to a range of factors including the removal of some buildings for the development of the Metro rail system.

Investa has analysed the past 16 separate leasing transactions across one of its typical assets in the 12 months to September 2017. The 16 transactions totalled nearly 4500 square metres and the leasing spreads ranged from 10 per cent to 75 per cent with the average leasing spread being 30.8 per cent.

"Positive leasing spreads are one of the contributing factors to the feeding frenzy surrounding the acquisition of prime and secondary assets in Sydney," Investa's Michael Cook said.

Yields on Sydney offices have been falling as prices rise in expectation of this rent reversion. Big deals such as the purchase of 1 Castlereagh Street and a 50 per cent share in the MLC Centre by Dexus have been built upon this expectation.

"The potential for uplift in rentals in buildings such as MLC Tower, 231 Elizabeth Street and 1 Castlereagh Street could render the aforementioned outcome positively soft.

"When Investa vigorously pursued 135 King Street and Piccadilly, the potential to capture these rental reversions was the outcome that motivated and vindicated these purchases."

Workplace design company Axiom took a lease late last year in an office building at Investa Office Fund's 6-10 O'Connell Street.

The company paid $995 per square metre while the previous tenant's lease ended at $748, representing a leasing spread of 32.9 per cent.

This is about average for the past 14 or so deals at 6-10 O'Connell Street.