Prices On The Rise As Offshore Investment Dominates Local Property Markets


Offshore investors are looking for innovative ways to enter the Australian office market as it becomes more expensive and access to stock, particularly in the prime CBD markets of Sydney and Melbourne, increasingly limited.

According to Colliers International’s latest research report,

Prices soar as offshore investment dominates: Is Australia becoming too expensive?, having exposure to Australian property is now considered to be a necessity for most large global players, regardless of it becoming more expensive.

“A decade ago, Australian property was not on the radar for many global investors and it was at this time that Australia represented exceptionally good value when compared to similar options,” John Marasco, Colliers International Managing Director of Capital Markets & Investment Services, said.

“Australia’s exceptional economic growth record remains one of the main reasons for such strong interest, however the sophistication and maturity of our property markets is also a factor. Australia’s transparency, strong governance and robust planning regime are well established. We are also considered to have a relatively friendly foreign investment policy and tax regime.”

Mr Marasco said several key structural changes to the market would continue to stimulate offshore interest in Australia in the year ahead.

“We have started the year with volatility in share markets, an Australian dollar that remains at record low levels and fears of an economic slow down in China,” he said. “As a result, our market is seen as a safe haven for investors looking for a secure destination for their money.”

The popularity of Australian property and the focus on Sydney and Melbourne prime assets as top targets meant that it was increasingly difficult to access stock. As a result, offshore investors were beginning to look at different ways to increase their exposure to the market.

Despite the majority of investors still focusing on core assets, one alternative entry method was to move up the risk curve. This could be done either by purchasing lower grade stock and looking to value-add through upgrades or conversion to residential; buying in secondary locations; or investing in property types such as student accommodation, self storage and retirement living.

“Capital partnering with local groups is another option and we continue to see a large number of these deals taking place,” Mr Marasco said. “For offshore groups, capital partnering provides the ability to build scale quickly, to tap into local expertise and to access a development pipeline. Australian institutions are generally well established with good track records and hence retain the ability to mitigate risk.”

Other ways that large offshore groups look to increase their exposure to Australian property included company acquisitions, public to private deals, investing in wholesale funds, investing in companies – both listed and unlisted – and providing debt.

The report found offshore investors purchased far more than they sold in Australia in 2015, which was in direct contrast to Australian investors who were net sellers of property.

“Right now, offshore investors overwhelmingly see Australia as a good market to be in and made a direct push to enter the market or dramatically boost their portfolios,” Mr Marasco said. “For CBD office property, the strength of offshore buyers is even more apparent, with these groups buying half of all office buildings in 2015. By value Chinese investors spent more buying CBD offices in 2015 than Australian investors.

“Whereas historically Singaporean, US and Canadian investors dominated investment in Australian office assets, Chinese are now eclipsing all of these groups when it comes to purchasing this asset class.”

In 2015, offshore investors accounted for 65% of total direct investment in CBD office buildings. If indirect investment was included, this proportion was significantly higher. Offshore investors now own 17% of Australian office stock, around twice as much as they did five years ago.
Nerida Conisbee, Colliers International National Director of Research, said although Australia was a particularly popular target for offshore investors, the small size of the market made it difficult for them to access stock.

“Although the main Australian CBD markets contain 15.5 million sqm of office, the majority of offshore capital continues to target Sydney and Melbourne which reduces the amount of stock available to less than 10 million square metres,” Ms Conisbee said.

“The other factor is that Australian CBD office ownership is becoming more concentrated. The top five owners, all Australian institutions, now control more than 20% of total stock and these groups have a tendency to hold CBD office assets for long time periods. The ability of offshore groups to purchase prime CBD office properties is going to become increasingly difficult unless an acquisition of a major owner is undertaken.”

Incentives on Australian property were high from both an historical perspective, as well as in comparison to overseas. Currently, the vacancy in Sydney CBD office was 6.3% while incentives were 31%.

“The last time incentives were at this level in Sydney was in June 1992 when the vacancy was sitting at 20.3%,” Dwight Hillier, Colliers International Managing Director of Valuations & Advisory Services, said. “In comparison to global markets, New York has a vacancy rate at 10% and incentives are just 10%.

“High incentives impact upon yields and although Australian office yields are high, once incentives are taken into account (“effective” yields) they are reduced dramatically. Borrowing costs also make a difference. Sydney effective yields are currently at 4.2%, higher than London at 3.1%, however the Bank of England’s interest rate is currently sitting at 0.5% compared to Australia at 2%.”

Colliers International research has indicated investor sentiment towards Australian property in 2016 remains strong.

“In late 2015 and early 2016, we held one-on-one interviews with 10 major offshore investors in Australian property – a mix of investors with an Australian presence, as well as those with no local operations,” Ms Conisbee said. “Not surprisingly, particularly given the high levels of investment made in 2016, sentiment towards Australian property remains strong despite a general consensus that Australian property is getting expensive.

“Although Australian yields are generally higher than comparable markets, once Australia’s high tenant incentives and higher borrowing costs are taken into account, the gap tightens significantly.”

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