Foreign investor appetite to drive growth in Melbourne’s commercial property market
Foreign investor appetite to drive growth in Melbourne’s commercial property market
11 March 2015
Melbourne, 11 March 2015 –Australia’s commercial property sector is set to remain high on the radar of foreign investors, with Asian buyers increasingly looking to mature markets to inject capital and diversify property interests in a bid to unlock long term growth opportunities.
That was one of the key themes of CBRE’s annual Market Outlook breakfast in Melbourne, which included presentations from CBRE’s Asia Pacific Head of Research, Dr Henry Chin, CBRE’s Australian Head of Research Stephen McNabb and a panel of CBRE experts providing insight into the different sectors of the market.
Citing results from CBRE’s Asia Pacific Investor Intentions Survey 2015, Dr Chin said while the percentage of investors planning to make real estate purchases this year had dipped slightly year on year - 54% year-on-year in 2015 compared to 64% in 2014 – there had been a significant shift in targeted assets.
“Investors have switched their focus from secondary assets in 2014 to prime core assets, with 43% of investors showing a preference for this type of asset,” Dr Chin explained.
“The prime core market continues to dominate in the Asia Pacific region, with slightly reduced investment confidence and lower risk tolerance driving up appetite levels for more stable investment options.”
Dr Chin added: “Led by institutional investors and REITs looking for stable income portfolios with longer holding periods, investors seeking prime core assets see Asia Pacific as a key component of the diversification of their global portfolio and are increasing their allocations to the region.”
The office market continues to dominate as the sector of choice amongst investors, with 32% of survey respondents showing a preference to invest their capital in this area of the market. The industrial logistics market emerged as the second most sought after sector at 22%, followed by the hotel market with 12% showing an interest to invest in this asset class.
Dr Chin said there was also strong interest from investors to inject capital into alternative sectors of the market, with real estate debt in Australia and China emerging as the most preferred sector. Healthcare and retirement living assets are also set to rise on the radar of investors, with 21% and 19% of respondents showing an interest in these sectors respectively.
While Australia will continue to compete with the larger markets of the Americas and EMEA for Asian outbound investment, it attracted US$5.2 billion of investment in 2014 - the third largest share globally and a 33% increase year on year.
Dr Chin said the survey also showed Korean investors had surpassed Chinese buyers as the most active investors.
“These buyers are increasingly looking to diversify their property portfolios with assets in major gateway cities,” Dr Chin explained.
CBRE’s Stephen McNabb said the unexpected lower interest rate environment, combined with lower oil prices and the lower AUD, was a game changer for the economy that would support Australia’s property market.
“We are experiencing a gradual economic recovery, particularly in the south-east regions of Australia – Sydney and Melbourne - which is going to underpin growth and improved conditions in the wider property market,” Mr McNabb said.
“The lower Australian dollar which fell quicker than expected has taken the heat off several industries, including the retail and industrial markets.”
He added: “Additionally, lower oil prices are adding more to consumer wallets, which will further support consumer spending and hence retailers.”
2014 was the strongest year in a decade for Melbourne’s investment market, with $8 billion in transactions recorded across the office, retail and industrial markets.
Mr McNabb said smaller Chinese investor groups were significant, contributing to 25% of total foreign investor activity in Melbourne.
“From 2010 to 2012, two thirds of foreign investment in Australia was directed from the US and UK primarily, with just one third coming from APAC investors. 2013 and beyond, there has been a real shift, with only one third of investment now coming from non APAC investors,” Mr McNabb said.
Mr McNabb said there was also strong interest for conversion opportunities, with investors looking to capture value before yields in some markets compressed further.
Mr McNabb said the residential market had continued to outperform other sectors of the market, with Melbourne experiencing a boom over the past five years.
“Unabated demand for residential property both nationally and in Melbourne has seen a surge in interest and transaction activity for residential sites, with 40 site sales transacting across Melbourne last year, with an average cost of $24 million.”
There is however, an oversupply risk for the Melbourne residential market, Mr McNabb said, explaining that a higher vacancy rate of 4% in the inner-city should see construction slow.
Mr McNabb said Melbourne’s office market was in a prime position from an investment perspective, with it now the most balanced market nationally.
“Whilst we forecast flat rental growth over the next 12 months, improvement from 2017 will see rents catch up and yields compress as capital values increase,” Mr McNabb said.
The transport and logistics sector of the industrial market continues to support growth in the industrial market, despite a contraction due to manufacturing decline.
“The lower dollar will lift competitiveness in the market and boost demand, while lower oil prices will reduce costs,” Mr McNabb said.
Off the back of having to absorb 2 million square metres of supply in 2014, the industrial market is better positioned for growth, with the forecast supply pipeline back at the average 1.5 million square metres.
Prime CBD rents increased 10% in Melbourne, with Large Format retailers also experiencing a growth of about 2% during the same timeframe.
Mr McNabb said the retail market would respond positively to the better trading environment and tight vacancies driven by surging interest from offshore retailers.
“Despite demographic changes influencing the way people shop, the death of the store isn’t here yet, there are still opportunities for retailers to capture,” Mr McNabb said.
Citing research from CBRE’s APAC Consumer Survey, more than 50% of 25-34 year olds want more food and beverage retail options, as well as more foreign brands.
“Getting this mix right is imperative for retailers who want to capture the full value of this opportunity,” Mr McNabb explained.
The outlook and opportunities for each sector were discussed more broadly in the Market Outlook panel session with some of the key insights being as follows:
Mr Coster noted that the office sector remains extremely popular amongst investors, particularly in the Sydney and Melbourne markets where prime core assets are highly sought after.
“With the current yield gap of about 100 basis points between prime and secondary assets, there is huge potential to capture value in that space before yields compress further,” Mr Coster said.
“While some investors remain strongly focused on core prime assets, there is a growing investor base for B and C grade assets. Core buyers however, continue to be disciplined and unwilling to move up the risk curve. This will continue to create opportunities for those with appetite for risk.”
Mr Tracey said divergence in some sectors of the market presented significant opportunity for investors looking to maximise the value of their assets.
“Incentives have peaked and tenant demand is improving. Those that understand that differentiation is important will reap the rewards, if you offer something different, something that tenants want rather than just more of the same you will reap the rewards,” Mr Tracey said.
“Demonstrating your product is different will give you the opportunity to be a price maker, not a price taker.”
Chris O’Brien, National Director, Industrial Investments
Mr O’Brien said the market was dealing with a very different set of clients than it was 12 months ago.
“Whilst there is overwhelming strong demand for prime assets, investors are focused on allocating their capital in areas with long term growth prospects,” Mr O’Brien said, adding that Australia was now competing with global markets in all sectors.
Mr Palmer said there was unprecedented demand from foreign retailers looking to gain a footprint in Melbourne’s retail market.
“Off the back of immense success with international retailers opening in other locations around the country, the opening of Victoria’s Secret in the Emporium smashed records, which is testament to the strength of demand currently being seen here,” Mr Palmer said.
“It’s not just hype, it’s here and it’s happening.”
“Rents on Collins Street at the Paris end have risen due to unprecedented demand from luxury retailers from $3000psqm to above $5000psqm with the recent openings of Gucci, Dior and Longchamp.”
Mr Palmer said H&M’s GPO store was one of the brand’s best performing stores globally, and could potentially achieve $100 million turnover in its first year.
He added: “Lower oil prices translated to an additional $10 billion into consumer wallets and was set to be a key driver supporting increased growth in the retail market going forward.”
Martin Priestley, Senior Director, Capital Advisors, Asia Pacific
Mr Priestley said there was huge opportunity for new funders to enter the Australian property market.
“One of the most interesting things currently happening is the emergence of non-banks into the Australian market.
These groups have large well established loan portfolios overseas. CBRE has worked with these groups over many years as both an originator and loan servicer. Australia is an opportunity to grow these portfolios further and a natural extension of these existing relationships,” Mr Priestley said.
“The global players are here. Pension funds and insurance companies are looking to our shores for long term returns. There has been a significant increase in activity and interest from these debt investors and funders mirroring what we are seeing from offshore equity investors. ”
Mr Priestley also noted there was massive demand for equity and debt opportunities in the Australian market.
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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 2014 revenue). The Company has more than 52,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 370 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.