valuation

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North Sydney freehold stock enjoyed solid investor demand from institutions, driving yields down in 2006, with prime yields breaking the sub 7.00% barrier. However, relatively softer investor demand in the strata market led yields to remain static during 2006, with yields continuing to average 7.00% to 7.50%. Reduced investor demand was contributed.

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No new supply entering the market since the completion of the Blade in 2003 and Milsons Landing in 2004 (pre-sales 2002 and 2003). A mixed outlook amongst private investors for the North Sydney market following high vacancy rates and modest rental growth.

However, this slow down in investor demand has create d opportunities, allowing savvy investors the opportunity to achieve yields greater than 7.50% Crow’s Nest / St Leonard’s is the second largest strata market on the Lower North Shore, comprising 54,600 sq m of stock across 29 buildings.This represents 28% of the Lower North Shore strata office stock and equates to 14% of the Sydney CBD strata market. Like North Sydney, Crow’s Nest / St Leonard’s strata stock is made up of a mix of B, C and D grade buildings. The average size of a strata development in the precinct is 1,700 sq m.

The Crows Nest / St Leonard’s strata market has experienced significant growth in size during recent times, increasing 35% over the past three years. , declining in size by 10% over the same period due to redevelopment of commercial space, predominately to mixed-use residential. His ha s resulted in a lower level of freehold stock in the market (the stock demolished or re-developed to mixed-use) and has increased the supply of strata commercial space, which typically comprised the ground and lower levels within new developments.

The most recently completed strata subdivision is 156 Pacific Highway comprising 3,400 sq m across 27 suites. There are currently no significant strata projects in the pipeline, however, two small scale mixed-use developments are at early stages of the development cycle.The vacancy rate in the Crows Nest / St Leonard’s strata market increased from 8.7% in July 2006 to 10.1% in January 2007 (Property Council of Australia), however continues to trend below the freehold vacancy of 11.3%.

The strata leasing market was steady 2006 with net absorption for the 12 month period of 2,595 sq m, albeit down from 2005 (6,121 sq m). However, this demand was not sufficient to meet the 3,800 sq m of new supply entering the market, leading to the increase in strata vacancy.In the 12 months to March 2007, gross effective rents for strata space experienced modest growth to range from $230/sq m to $300/sq m. Incentive levels continue to average 25%.