(Corrects paragraph 1 to say capital values are set to fall by up to 15 percent, not rental movements. Corrects paragraph 6 and table to refer to capital values)
By Eriko Amaha
SYDNEY, Nov 25 (Reuters) - Sydney office rents are seen under further pressure and capital values are set to fall by up to 15 percent next year, analysts say, as landlords scramble to entice tenants as demand for space from the financial industry wanes.
About 60 percent of tenants in Sydney's main business district are financial and insurance firms, which are bearing the brunt of the global credit crisis.
Tenants are starting to sub-lease space at a discount, halting five years' of double-digit rent rises.
"The big thing next year will be how many tenants will contract in size and look to surrender a portion of their space or relocate altogether," said Darren Whitelegg, managing director of real estate management of Colliers International in Sydney.
"Any landlords at the moment who have got vacant space are a little bit nervous about what the next year holds, so they are trying very hard to get tenants as we speak."
Analysts at Citigroup and consultants DTZ believe capital values at Sydney's top-notch buildings will fall 15 percent over the next 12 months, while CB Richard Ellis says a drop of 8 percent is likely.
Local media have said struggling fund manager Babcock &
Brown Ltd.
About 43,000 sq m of sublease space is in the market, double the amount just six months ago, according to property consultants CB Richard Ellis.
Although the figure is only a fraction of the total 4.7 million sq m of office stock in the city, rents in the sublease space are competitively priced and industry watchers say the ramifications for the direct lease market are huge.
Landlords competing to lure tenants are also offering more incentives, such as finance for fit-outs and relocation.
The average lease incentive in Sydney's central business district is now 20 percent of a long-lease, or equal 24 months of free rent on a 10-year contract, compared to 15 percent in 2007.
Property industry executives expect the incentives to go up to 30 percent or more next year, a level not seen since the early 1990s, when the Sydney property market had a sharp downturn.
"There is no question that the rents are falling and incentives are increasing," said Tim Green, managing director for Tim Green Commercial, a Sydney-based leasing agent.
"And we are probably sort of half way to where it's going to go."
Green said some landlords had already dropped headline rents by 10-15 percent.
As of September, an average grade-A building was fetching $700 per sq m, a 14.3 percent increase from a year earlier, according to consultants Savills.
Belinda Nowland, a researcher for Savills said she now expected face rents to remain flat in the next 12 months but real rents would drop due to incentives.
Cameron Williams, state director for Colliers International, said he expected an additional 20,000-30,000 sq m of sublease space to come onto the market in the next 6 to 9 months.
But he added that unlike the early 1990s, Sydney's office vacancy rate is at historical lows and no major property supply is due until 2010.
"We believe it's going to be a short-term phenomena -- 12 to 18 months -- because at the end of the day, once we get through this low level of sublease supply, we will fall back to a very tight vacancy market," he said.
Forecasts for Grade-A capital values in 12 months:
Citigroup down 15 percent
DTZ down 15 percent
CB Richard Ellis down 8 percent
Jones Lang LaSalle flat
WBP Property Group flat