Australia has been ranked as the second most attractive country behind China for cross border investment according to CBRE’s Asia Pacific Investor Intentions Survey 2014.
The survey gauged the appetite and outlook of Asia Pacific real estate investors for the rest of the year. It showed that a significant majority of investors expected to commit more capital to the Asia Pacific real estate market in 2014 compared to 2013.
Total real estate investment turnover in Asia Pacific for 2013 reached US$90.4 billion, a rise of 24% year-on-year and the highest figure recorded since CBRE began collecting data in 2005.
Despite the record total reached last year, and various concerns ranging from high pricing to slower economic growth, a majority of respondents indicated that they will continue to commit more capital to the Asia Pacific real estate market, with 64% expecting their purchasing activity to be higher than in 2013.
Key outtakes for Australia
CBRE’s Australian Head of Research Stephen McNabb said the inaugural survey highlighted a number of key messages for the Australian market.
“Not inconsistent with our current read on the market, the results show that Australia still ranks highly in terms of cross border investment attractiveness,” Mr McNabb said.
“Australia ranks No. 2 (identified by 18% of cross border investors) after China (28%) as the most attractive country for property investment, with Sydney and Melbourne ranking 3rd and 4th respectively in relation to city investor preference, after Tokyo and Shanghai.”
However, Australia ranked number one on actual investment last year accounting for 35% of cross border investment. Mr McNabb said this suggested that foreign capital inflows to the Australian market could slow in 2014 as we began to compete with China and other growth regions for global capital.
“We expect a slowing – not an exodus – in capital inflows. This is consistent with our view that demand for AUD assets falls relative to improving growth stories globally, the outcome of which has been reflected in a lower AUD over the past six months of so,” Mr McNabb said.
CBRE Senior Director, International Investments, Michael Andrew said there were also signs that investor interest was broadening to secondary markets outside the main CBDs.
“Australia is still witnessing very strong demand for core real estate across all sectors, however we have seen the emergence of an appetite for assets in what has often been seen as secondary “non-core” markets, where investors understand they can still get high quality assets, strong covenants and at better yields than in the CBD’s,” Mr Andrews said.
The survey also highlights that investors are demonstrating a shift in preference to industrial assets regionally with industrial/logistics investment seeing some up-weighting in portfolio allocation compared to the office sector.
Indeed, the Australian industrial and logistics sector was identified as the most attractive country-based sector for investment, ahead of Australia offices, China industrial & logistics and Japan offices.
“This is consistent with our local expectations that the cyclical economic recovery will assist industrial assets which are starting with a higher yield and potential for an improved rent trajectory compared to office assets in the short term,” Mr McNabb said.
CBRE Regional Director, Industrial & Logistics Services, Matt Haddon added that the heightened interest was already translating to increased buyer activity with $4.5 billion to $5 billion in Australian industrial investments expected to change hands this year. This was up from circa $3 billion in 2013 and the highest level of activity since 2006.
“Vendors have the confidence to sell into this market knowing that yields are tightening, so the availability of premium logistics assets is there to meet the demand from local and offshore investors,” Mr Haddon said.
The survey also highlighted an improved appetite for secondary assets across the region.
“Locally, we expect this to support previously underperforming classes of assets in the retail and industrial sectors. This includes large format retail; sub-regional/neighbourhood shopping centre and some secondary industrial assets, particularly given the vacancy risks in the office sector,” Mr McNabb said.
Which Sector in APAC is the Most Attractive for Property Investment in 2014?
Breakdown of Market Interest
Asia retained a lot of appeal for investors, with Emerging Asia and Developed Asia topping the list of preferred regions to invest in globally, with 23% of investors saying they targeted each. There was also strong interest in investing in North America and Western Europe as the recovery in the West takes hold, with 20% and 16% of investors interested in these markets, respectively.
The office sector was identified as the most popular sector for investment (32%) followed by industrial and logistics (29%) and residential (21%).
Meanwhile, interest in retail assets cooled somewhat from previous years in part because of the challenges of sourcing investable assets, and pricing.
The survey also revealed a number of other interesting trends, including:
• Respondents continued displaying a strong preference towards investing in gateway cities such as Sydney, Tokyo and Shanghai
• Investors are polarized at both ends of the risk curve; some indicated that opportunistic/value-added is their preferred asset type; others are looking at prime/core whilst relatively fewer opted for secondary assets
• Investor appetite for secondary assets is increasing, however, as buyers are deterred by the aggressive pricing for prime/core assets and look to capitalize on the pricing gap between core and secondary locations
”Given the current hard pricing for core assets, core fund returns have shrunk significantly. This is making value-added and opportunistic strategies more appealing to investors. That said, the appetite for prime or core assets remains strong from Asian institutional investors whose portfolios are seriously underweight on property,” said Ada Choi, Director, CBRE Research Asia.
Relatively fewer respondents (21%) prefer good secondary assets, and as a result the pricing gap for good secondary locations and assets is wide, and is becoming attractive.
“Investors in secondary assets may consider taking on some leasing risk in the early stages of the recovery cycle as rental growth begins to pick up in a number of key markets. Given the low yield environment and chronic shortage of core assets in Asia, investors are showing a preference for riskier investments and are looking for value-added opportunities. This trend partly explains why a larger percentage of funds recently raised were focused on opportunistic strategies,” said Ms Choi.
The CBRE Asia Pacific Investor Intentions Survey 2014 was carried out online between January-February 2014 and covered a wide range of real estate investors, in particular including fund or asset managers, but also others including private equity firms, banks, insurers, private property companies and REITs. Respondents were primarily comprised of Asia Pacific-domiciled investors, but global investors headquartered elsewhere, but with the ability to invest in Asia Pacific, were also included.