Australia in pole position for increased international investor interest
Australia in pole position for increased international investor interest
8 March 2016
Sydney 08 March 2016 – The Sydney office market is one of only three “leaders” in Asia Pacific in relation to rental increases and prospects for some further yield compression, according to new CBRE forecasts.
Speaking at the firm’s annual Sydney Market Outlook event, CBRE’s Head of Research, Asia Pacific, Henry Chin, said Sydney, Hong Kong and Tokyo were the current office market standouts, with Korea, Seoul and Perth being the laggards.
Backed by these fundamentals, Mr Chin said key Australia markets such as Sydney remained well positioned to continue to attract investor interest, underpinned by the strong market conditions.
These forecasts also align with a new CBRE Investor Intentions Survey, details of which are due to be issued next month. The survey shows that Australia has jumped from second to first position in Asia Pacific as the market most favoured as a cross border investment destination.
CBRE Head of Research, Australia, Stephen McNabb, said the Sydney market was supported by much stronger fundamentals with net absorption tipped to average 55,000sqm per annum over the next three years underpinned by strong growth in IT and financial services firms. Net supply will also be negligible over this period as stock is withdrawn from the market.
This has been one of the attractions for offshore investors, Mr McNabb said, with inbound investment into the Australian commercial property market having increased by 45% in 2015 relative to the previous corresponding period.
However, Mr McNabb noted that investors needed to adjust their risk/return expectations.
“Yield compression has driven strong investment returns in recent years. However, investors will now increasingly be looking at the income growth fundamentals of their assets and what they can do to improve the growth potential of their individual assets and property portfolios,” Mr McNabb said.
CBRE’s Market Outlook presentation was followed by a panel discussion, key points from which are summarised below:
Josh Cullen - National Director, Capital Markets
Mr Cullen told the audience that capital inflows showed no signs of abating as highlighted by the CBRE Investor Intentions survey, which had ranked Australia in #1 position for the very first time in relation to its attractiveness for cross border Asia Pacific investment.
Mr Cullen likened conditions in Sydney to a “perfect storm” as result of enhanced tenant demand, which was underpinning investor interest in a limited pool of investment opportunities. His view is that this will drive another 25-50 basis point reduction in investment yields in the next 12-18 months, which could lead to prime office yields falling to as low as 4.75%.
Mr Cullen also predicted that investors would increasingly look at well aligned partnership deals to get a foothold in the Sydney market.
Ms Cranston predicted that the downward cycle for Sydney office rents had ended and that the B-grade office market had potentially the strongest growth prospects in the short term.
This would be driven by significant stock withdrawals this year, with 55,000sqm of space being removed from the market in the next 12 months.
Ms Cranston also tipped that the “war on talent” would have a significant impact on the leasing market, with companies willing to pay net face rent premiums in the range 20-40% to secure new, Prime Grade office space with the expectation that this would assist in the attraction and retention of staff.
David Milton - Managing Director, Residential Projects
Mr Milton said recent months had heralded a return to a “normal market” in the Sydney residential sector, as opposed to the heady conditions of recent years when 100% sellouts had been common on launch weekends.
Whereas sales rates from walk-in buyers to display suites had been as high as 1 in 3, Mr Milton said rates were now more like 1 in 7 or 8 – in line with the market conditions of 2012-2013.
Mr Milton said sales rates continued to be very strong in well located projects – however, he warned that developers now needed to “get it right in the first instance” and be cognisant of the benefits of being able to stage projects following a tightening in bank lending conditions.
He also tipped that while apartment sale prices could decline marginally in some middle ring suburbs, the expectation was for continued strong price growth in markets such as the Sydney CBD.
Jason Edge – National Director, Industrial & Logistics
Mr Edge said demand for industrial space in Sydney was driving a surge in speculative development with institutional land owners either developing with no tenant in place or on the back of a partial pre-commitment.
He also tipped that a focus by 3PL companies on developing a “hub and spoke” model to best serve customers would drive demand for “in-fill” locations such as Sydney’s south sydney, along the north shore and middle ring areas such as Homebush and Chullora to supplement locations in the west and south west.
This would be driven by e-commerce – with Australian organisations to be challenged by the expectations in the US whereby groceries are looking to be delivered within two to three hours and Amazon deliveries within the next hour.
“Our expectation of how products are provided in Australia is going to change and the provider is going to have to change in tandem with this,” Mr Edge said.
Suzette Lamont – Director of Client Solutions, Asset Services
Ms Lamont said a growing emphasis on Food & Beverage (F&B) retailing was driving a fundamental shift in the Australian retail sector. This was in tandem with changing demographics, with one in 10 Australians having been born in Asia.
Whereby F&B had traditionally accounted for a maximum of 25-30% of a retail centre’s income, Ms Lamont said this was now as high as 65% in developments such as Central Park on the Sydney CBD fringe.
She attributed this to multicultural flavour of Australia’s population, which meant people were becoming more “global” with how often they ate out and viewing restaurants and cafes as an extension of how they were socialisinig.
“We’re adapting to high density living, we’re time poor and the blur between work, shop and play is a reality. The clever developers are looking at mixed use developments and looking at how they can give people their weekends back,” Ms Lamont said, citing 80 Collins Street, Melbourne as a prime example, with that development including a blend of commercial, retail and hotel space.
Ms Steele told the audience that the “era of the tenant was dead” with the emphasis now well and truly on occupiers as customers.
“The traditionally feudal relationship between tenant and landlord is being flipped on its head,” Ms Steele said.
“Customers are wanting more than ever before. They’re time poor, they’re tech savvy and they’re very demanding. And given the war on talent they’re making their real estate decisions based on the attraction and retention of staff rather than rental costs.”
In response, Ms Steele said CBRE was conducting customer services training for property management personnel from groups that trained staff from organisations such as Disney and Host Hotels & Resorts.
“The built form is driving culture – and culture is a key decision maker as to whether people want to stay or leave an organisation. There is a shift to the ‘one size fits one approach’ where you need a bespoke approach to the services you provide,” Ms Steele concluded.
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About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (in terms of 2015 revenue). The Company has more than 70,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 400 offices (excluding affiliates) worldwide. CBRE offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. Please visit our website at www.cbre.com.