Asian capital a key driver for Australian investment market
Asian capital a key driver for Australian investment market
12 March 2014
Melbourne, 12 March 2014 –While Australia will increasingly compete with other destinations for foreign capital, Asian investment in our property market is continuing to rise and buyers are broadening their focus.
That was a key theme of CBRE’s annual Market Outlook breakfast in Melbourne, which included presentations from CBRE’s new Asia Pacific Head of Research Dr Henry Chin, CBRE’s Australian Head of Research Stephen McNabb and a panel of key CBRE executives.
Yields have been a key attraction for the Australian market with Dr Chin noting that at 6.7% and 6.1% respectively, average prime office yields in Sydney and Melbourne were well above other Asia Pacific markets such as Tokyo, Hong Kong and Taipei where yields were below 3%.
However, with Asian markets stabilising and stronger growth in the US, the relative attractiveness of Australia as an investment destination is changing – particularly in light of the lower AUD and higher rental growth expectations in other markets.
CBRE’s Stephen McNabb said foreign investors had increased their net exposure to Australian commercial property by $15 billion - and to Melbourne by $5 billion - since 2007. However, competition for capital was increasing as global economies improved.
However, Mr McNabb forecast that the rate of foreign investment would begin to slow – although an offset has been the increasing capital flow from Asian, which represented more than 50% of total cross border investment in the Australian commercial property market in 2013.
The level of foreign buyer interest in Australia was also a key theme of today’s panel discussion, with CBRE City Sales Director Mark Wizel noting that more than $1.3 billion had been invested in Melbourne CBD and near fringe development sites in the past two years – predominantly by offshore Asian groups.
However, he forecast that Asian buyers, particularly from China, would soon begin to broaden their focus from being predominantly interested in development sites to looking at core property and more passive investment opportunities.
“The market is going to move in the next two years and the game changer is likely to be the Chinese pension funds and major institutional investors. While the pioneers have been the privates, this is giving confidence to the institutional investors to follow suit and attention is shifting to core and value-add assets,” Mr Wizel said.
CBRE Executive Managing Director, Capital Markets, Mark Granter concurred and said he was fielding enquiries from new foreign groups every one to two weeks.
“If you look at all the markets around the world, the returns coming out of prime real estate in Australia remain more attractive,” Mr Granter
Stepping back to assess the broader global economic outlook, Dr Chin told attendees at today’s breakfast that a significant economic slowdown in Asia Pacific was unlikely, with long term growth rates expected to remain strong.
His advice for property investors was to focus on assets and sectors that would benefit most from this long term such as the logistics sector and non-discretionary driven retail assets. He also tipped that now was the time to move further up the risk curve where the opportunity for value creation still existed.
Dr Chin also advised that in a restricted lending environment with an outlook of rising interest rates, it was time for investors to looking at refinancing or securing long term finance.
“We’re also seeing opportunities for non-bank lenders such as insurance companies and private equity funds to bridge the funding gap, especially in Australia and Japan,” Dr Chin.
At a local level, Mr McNabb said business investment would continue to be a drag on growth in Australia, with mining spend expectations - which account for about on half of the total investment spend - down 20% for 2014/15.
“However, our expectation is that a consumer and housing led recovery will compensate for the mining investment peak and this, together with strong exports, is expected to drive economic growth higher towards the end of 2014.”
At a state level, Mr McNabb said Victoria had been desynchronized with the other states, after experiencing an earlier housing boom in 2009/10. However, while growth had slowed last year Victoria looked set to catch up with the rest of the country in 2014 with retail sales higher and the housing market stabilising.
On a sector-by-sector basis, Mr McNabb said the CBRE outlook was as follows:
Retail - higher sales growth will support rental growth in both regional centres and the large format retail sector. Investment yields have already tightened for all grades of shopping centres in Q4, 2103, amid is investor sentiment improved – particularly for assets such as large format retail centres which have underperformed post the GFC. The sector will also get a long awaited boost from an improvement in discretionary spending
Industrial - tenant demand conditions are expected to improve. While the manufacturing sector’s contribution to industrial output has fallen for decades, Mr McNabb said the contribution from the transport and storage sector had tripled and this was driving demand growth. While industrial supply was increasing, Mr McNabb said the market remained fairly demand driven and the cycle was improving to support growth next year with rents tipped to increase by more than 2% in 2015.
Office - expect tenant revenue to improve with the economy, however office will be the sector with the slowest rate of yield compression due to lower rental growth and there is limited potential for capital value growth in the short term. Office supply remains the key issue, particularly in Melbourne.
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:
Mark Granter, Executive Director, Capital Markets –Mr Granter noted that investors were being very disciplined in their approach and had lowered their return expectations on office investments from 8.5-9% 12 months ago to in the order of 8-8.5%. He also noted that while the majority of investors were targeting core assets, limited availability was leading to a shift in focus, with a growing number of buyers prepared to consider non-core and value-add opportunities.
Andrew Tracey, Regional Director, Office Services – Mr Tracey noted that confidence in the leasing market had improved since the start of the year. “We’re seeing a greater level of enquiry and, more importantly, a higher level of conversions.” He added that now was a “once-in-a-cycle” opportunity for tenants given the current “exceptional rental value proposition”. He advised owners to be agile, to treat tenants like customers and be “at the front end of negotiations, not the back end”.
Mark Wizel, Director, City Sales – In addition to his comments on Asian investor demand, Mr Wizel advised owners to sell on market rather than off market given the number of new players targeting the Australian market. “No-one really knows who the next most aggressive buyer will be.” Understanding the value-add potential of assets was also crucial.
Matt Haddon, Regional Director, Industrial & Logistics Services – Touching on the current media commentary in relation to car manufacturing and the impact of recent closure announcements, Mr Haddon said the impact on institutional investors would be limited with those buyers having moved their focus to the logistics sector over the past decade. He also noted that industrial property investment was this year tipped to reach its highest level since 2006. Mr Haddon added that buyers were factoring in an appropriate yield spread of circa 200 basis points between premium and secondary assets, as opposed to 25 to 50 basis points prior to the GFC and suggested that there was an opportunity for investors to move further up the risk curve
Neil Proudlove, Regional Director, Retail Investments – Opportunities lay in the large format retail sector and in neighbourhood and sub-regional shopping centre however across the board owners needed to focus on active management and active leasing to drive revenue. He also advised investors to lock in good, long term debt.
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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 2013 revenue). The Company has approximately 44,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 350 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 atwww.cbre.com.au.