Offshore Investors Fuel Australia’s Office Market

A report has found that during 2017 there was more than $6 of capital chasing every $1 worth of assets, highlighting the volume of unsatisfied capital in Australia’s office investment market.

The results, published in JLL’s latest report, Australian Office Investment Review and Outlook 2018, found that for a representative sample of assets that traded for in excess of $100 million there was $6.3 of capital for every $1 of investment product.

“This demonstrates the depth of Australia’s office investment market and the unsatisfied capital that is looking to be deployed in 2018,” JLL’s head of office investments Rob Sewell said.

“The diversity of capital sources is unprecedented and investor demand for assets across the risk spectrum remains firm.

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Offshore investors remain active participants in Australia, accounting for half of the office property deals struck last year.

Of the top ten owners of commercial real estate globally six have a presence in Australia including Blackstone Group, Brookfield Properties, Hines, CBRE Global Investors, TH Real Estate and Ivanhoe Cambridge.

“New sources of capital emerged in 2017 with Mitsubishi Estate (through CLSA) representing the first wave of Japanese capital seeking exposure to Australia’s office sector,” Sewell said.

“The net capital flow into the Australian office sector over the past five years (2012-2017) was $24.2 billion. To put this figure in context, we estimate the market value of the 19 CBD markets in Australia is approximately $260 billion.

“The market value of non-CBD office markets is estimated at $65 billion, so we expect to see these markets as viable investment destinations in 2018 for a diverse range of capital sources.

“Domestic and offshore investors were seeking exposure to metro markets in 2017 and while non-CBD markets only represented 33% of sales in 2017, we expect interest from a diverse range of capital sources in 2018.”

Related reading: Suburban Office Stock Returns Hit 10-Year High

Sewell said that the investment case for the Sydney and Melbourne non-CBD markets is particularly strong, with low vacancy, minimal development activity and rental growth continuing.

JLL also expects to see in 2018 a re-rating of non-core sectors, as unsatisfied institutional capital looks to alternative real estate assets, including student accommodation, retirement villages and medical centres.

Singapore investors most active

JLL’s head of research Andrew Ballantyne said that Australia is benefiting from both higher allocations to real assets and higher allocations going into the Asia Pacific region.

Transaction volumes in Australia’s office markets reached the third highest on record in 2017, at $16.2 billion. Offshore investors were active in both buy and sell opportunities.

The most active offshore buyers in 2017 remained Singapore at 18.2 per cent, Hong Kong 7.1 per cent and the United States at 8.5 per cent.

“Singaporean investors continue to remain Australia’s largest source of foreign capital in our office markets and in 2017, we saw a clear trend from some of the major groups to broaden their investment mandates to include more markets, beyond the traditional focus of Sydney and Melbourne.”

JLL expects Japanese investors will become a more dominant force over the next few years.