Off-shore investment in Australia—long a favoured destination for big global investors—has plummeted more than 60 per cent in the 12 months to September. Australia’s office sector, hammered by employees’ stubborn refusal to leave home for the central business district in meaningful numbers, is leading declines. Office sale volumes in the three eastern seaboard capitals have fallen between 71 and 79 per cent in a year. Even Perth and Adelaide—both with current weekly office occupancies above 85 per cent—have felt the chill. It’s not just Australia’s office—one of the worst performing in the Asia-Pacific region—that has seen big global investors “disappear from the market”. Thirteen interest rate rises in 19 months, inflation, construction costs and labour shortages have taken the shine off most industry sectors, as measured to the year’s third quarter. While a slump in office, retail and large parts of the residential sector was to be expected, the lustre may be dulling for the country’s surging industrial sector, according to two reports—a joint publication by the Urban Land Institute (ULI) and PwC, and another last month by the global financial services provider MSCI. Volumes in all major metropolitan industrial sectors are down, according to MSCI’s year-on-year data—Brisbane by 61 per cent, Melbourne by 51 per cent, and Sydney by 31 per cent, although to be fair, they are coming off big 2022 volumes. Even so, according to the ULI-PwC’s Asia Pacific Emerging Trends in Real Estate report for 2024, while on paper the structural undersupply of modern logistics infrastructure appears to make the investment thesis as bullish as ever, the sector may have hit a peak. Sales volumes by sector ▲ Only three metropolitan sectors have had sales volumes this year, which improved upon 2022. Two of them are in residential apartments. “Some investors see a cyclical peak approaching, with cap rates remaining tightly (and perhaps overly) compressed, effective rents that often significantly lag face rents, and the rent-growth story perhaps not as plausible as vacancy levels suggest,” ULI-PwC’s report says. Not everyone will agree. In the past five years for example, investment in Australia in newly developed industrial facilities has far outstripped equivalent spending on stabilised assets. Grant Advisory director and founder Peter Holland, who is also a trustee with ULI, was at the launch of the report in Melbourne. He says it’s not just the Australian market struggling to attract offshore capital. “No, this is not peculiar to Australia,” he told  The Urban Developer. “But given where the market is sitting in relation to interest rates, inflation and a whole number of things, like the office issues, it’s just not the right time and the values don’t make sense. “Investors are just not prepared to take that risk with the asking price.” ULI and PwC say buyers throughout the region are gathering on the sidelines, waiting for an event to trigger a market reset. The report blames the systemic stress caused by the region’s “higher-for-longer” interest rate regimes. “The entrenched nature of relationship-based banking in the region means that sellers are still under little pressure from lenders to lower asking prices,” the report says. “A bid-ask spread has therefore emerged in most markets.” Australian transactions by property type ▲ Source: MSCI The widest gap between buyer and seller expectations is in Australia and Hong Kong. And no more so than the office sector which at home saw deal numbers drop by 65 percent year-on-year. MSCI head of real asset research in the Pacific Ben Martin-Henry says they have been tracking transaction volumes across Australia for 23 years. “Every single year the office sector has been the number one sector for offshore investors,” he says. “But no one is buying offices, and that includes offshore capital.  “They’re simply staying away.” As one fund manager in Singapore said: “It’s shocking to me how interest has moved away from office, which used to be institutional-grade covenant, long leasehold, the core, easy, big-ticket size.”  Most years, Singapore and the US jockey for position as the biggest offshore investors in Australian property. But historically, Singaporean investors have targeted Australian offices. Perhaps it’s not surprising, then, that the island state has sent just $800 million to Australia in 2023—an 83 per cent year-on-year decline. ▲ MSCI’s Ben Martin-Henry, ULI trustee Peter Holland, and Home’s Christian Grahame. The retail sector’s fluctuating fortunes continued in the third quarter, according to MSCI, with deal volumes the lowest of the three core sectors. Retail volume was about $1.9 billion for the quarter, an annual decline of about 51 per cent. Both reports show that with office and retail sectors falling from favour, and with development largely seen as offering generally poor risk-adjusted returns, investors are left with a narrow range of options. That means beds. While overseas investors have put about $2.4 billion into the Australia apartment sector in 2023—outpacing office and industrial—the bulk of that was in purpose-built student accommodation (PBSA) and build-to-rent (BtR). In fact, only three metropolitan market segments recorded increases over the previous year—the Brisbane and Melbourne apartment sectors, and Perth retail, according to MSCI. Brisbane’s apartment market recorded nearly $700 million in transactions, or an increase of 376 per cent. That data was buoyed by New York-based Blackstone’s $500-million purchase of PBSA provider Student One. The world’s biggest alternative asset manager picked up 2300 beds in three student housing assets in downtown Brisbane, as part of its first foray into the sector. Foreign investment in Australia by source ▲ Source: MSCI ULI-PwC’s report says multi-family residential is probably the single most preferred asset class in the Asia Pacific, largely due to high property prices and reliable income streams with short-term lease structures that can be easily reset to counter inflation. Christian Grahame is head of Home, Australia’s biggest build-to-rent developer and operator. He says there has never been more interest in Australia’s living sector, including build-to-rent, but the market still needs to adjust to capital’s return expectations. “That means where there might have been opportunities that we were looking at in the first half of the year, we’ve had to say, these leads no longer represent the types of returns that we’re seeking,” he says. “If you look across the sector, there’s been a lot of projects that have spent the year trying to work their way through increases in construction costs, to value engineer and get to an outcome where they can then press the button to start construction.  “So, overall, we’ve probably seen less capital committed this year and less construction starts across the sector.” He remains bullish. Afterall, Australia’s booming population growth and the return of international students are prompting global investors to look for just such opportunities. Office occupancies 2023 by city ▲ Source: CBRE Research “One thing that is attractive about build-to-rent is that it’s scalable,” he says. “And in the investable universe the size of the potential market is much bigger than even, say, office.” And Home has another advantage. It still counts the same, single institutional investor backing all its projects—GIC, the Singapore government’s sovereign wealth fund. Australia too, has its advantages, says ULI’s Holland. It’s a stable country with political certainty, its laws are transparent and it’s market is liquid. Lots of people speak English. The fundamentals are good. “Look, one of the reasons a lot of institutions are keen on Australia—that is the Europeans and the Americans—is because it’s a way of having their funds deployed into the Asia-Pacific market,” Holland says. “And it’s a market that they can understand.” It’s a point all appear to agree upon. “There’s still a lot of interest in Australia,” Martin-Henry says. “But we usually tend to lag the US and the UK by about six months. “The problem is values haven’t adjusted yet, and so there’s better relative value overseas than in Australia at the moment.” Home’s Grahame is confident that will change. “Anyone looking at investment in real estate around the world is looking at Australia, saying, that’s one of the highest growth, most attractive economies in the world.” Quarterly office transactions, Asian Pacific ▲ Source: MSCI You are currently experiencing The Urban Developer Plus (TUD+), our premium membership for property professionals. Click here to learn more.