Australian commercial property transaction volumes have once again reached record levels in 2014, the third consecutive year this has been achieved.
A significant amount of investor groups, both foreign and local, have competed for assets driven by the hunt for yield and the opportunity for capital growth.
As we come to the close of another calendar year, the question people are asking is: What will happen to investment volumes in 2015 and who are the likely buyers and sellers?
One of the well documented trends is the increasing amount of offshore capital entering the country post the financial crisis. Australia’s economy performed strongly at a time when other major economies were contracting and the commercial property sector looked attractive to offshore investors.
Australia’s property yields are high relative to other mature markets, while the deterioration in occupancy rates was less severe than other markets.
The Sydney CBD vacancy rate is 10.1 per cent – lower than 40 of 44 CBD office markets in the US. As a result, net investment flows were at unprecedented levels from 2010 onwards.
Private investors who are typically counter-cyclical were net buyers from 2008 to 2012. A number of private investors acquired prime grade assets on attractive pricing metrics in 2008 and 2009.
Average prime grade office capital values have risen by 19.5 per cent since the trough. Some investors are taking the opportunity to realise gains and recycle capital into new opportunities in Australia or within the Asia Pacific region.
Sydney Harbour Bridge[/caption]Syndicates over the past two years have turned from net sellers to net buyers. The cost of debt is sub 5.0 per cent for well-rated borrowers and enabled syndicators to manufacture higher equity IRRs.
So what can we expect the Australian investment landscape to look like over 2015? The first question is where is the product is likely to come from.
As mentioned earlier, asset values have risen by 19.5 per cent between 2009 and 2013. A number of privates who purchased at that stage of the cycle will seek to crystalise gains over 2015. Syndicates who structured closed ended funds may be also coming to the end of the investment window and looking to trade out.
On the other side of the ledger, offshore capital is again likely to be a major play in the investment space over 2015. Sovereign Wealth Funds, pension funds and private equity firms will remain active participants in 2015.
A scarcity of core product will result in a number of groups looking to move up the risk curve and access core+ and value-add opportunities.
About the author
Jonathon Bayer is a Senior Research Analyst for JLL, based in Sydney, Australia.