Australia’s commercial property sector is expected to remain a magnet for foreign capital in the next 12-18 months, according to a new
CBRE special report focused on the country’s rise in prominence as an investment destination.
The report highlights that Australia has represented 5 per cent of global property turnover in the past three years - an above average share of activity and well above the country’s GDP weighting of 2 per cent.
This had been driven to a large extent by foreign capital, with Australia attracting more cross border investment than any other Asia Pacific market between 2012 and 2014.
CBRE’s report Capital Attraction: the rise of Australia as an investment destination highlights that stronger economic growth, perceptions of lower risk and the combination of higher interest rates and yields have helped boost foreign buyer interest, not just in commercial real estate but also in Australian infrastructure, government bonds and residential property.
CBRE’s Head of Research, Australia, Stephen McNabb said, “Australia has attracted an above average share of capital primarily due to firm and stable economic conditions, which have supported a higher interest rate and yield environment in comparison to other markets globally.”
“Capital follows investment opportunity and Australia has stood out as a recipient of global funds due to strong growth in real asset accumulation while business investment in other markets stagnated. The associated growth in Australia’s relative income saw a re-rating of prime rents in a global context in line with the stronger AUD. For instance, over the past decade, prime office rents (in USD) in the Sydney CBD have doubled while many other established markets around the world have seen much less significant growth," Mr McNabb added.
CBRE’s report highlights that foreign investors have increased their balance sheet exposure to Australia by AU$18.8 billion over the past seven and a half years, with 68 per cent of these funds directed at office property and just over 29 per cent invested in retail assets.
Singapore, the US and Germany have been the largest source of net foreign investment over that period, however Asian investors took the lead position last year.
In total, Australia attracted 12 per cent of Asian outbound capital in 2013, with a similar proportion of funds invested in the first half of this year.
CBRE Senior Director, International Investments, Rick Butler said this momentum was expected to continue as new capital emerged from Asia.
“For instance, recent CBRE research highlights that an additional US$75 billion is expected to be invested into commercial real estate globally by Asian life insurers as a result of ongoing deregulation, with China and Taiwan leading the charge,” Mr Butler said.
“We’re also seeing continued interest in this market from institutional investors and sovereign wealth funds with Asian developers also targeting opportunities to convert secondary office stock into residential apartments. For example, Singapore’s Far East Organisation has acquired four office assets in Sydney while China’s Greenland is building Sydney’s tallest apartment tower at 115 Bathurst Street in the CBD.”
Melbourne has been another target, with Singapore’s Fragrance Group acquiring 555 Collins Street, another Singapore group Aspial securing the Australia 108 site and Malaysia’s PJ Development acquiring Kavanagh Street, Southbank.
Another focus of the report is the longer term outlook and whether Australia will continue to attract a higher than average share of global real estate capital.
“On the whole, we are optimistic of a continuation of current trends over the next 12-18 months, although we acknowledge that Australia’s relative attractiveness will fade beyond that and that allocations are likely to normalise over time,” Mr McNabb said.
“An improvement in global economic growth and a return towards ‘normal’ interest rate settings, while appearing some way into the future, will be the likely catalyst.”