Article | Intelligent Investment
Australian Real Estate Investment: Is 2024 a Turnaround Year?
From investor sentiment to risk appetite, we identify the property sectors that local and global capital are currently eyeing.
April 17, 2024
The capital flowing into Australia’s commercial real estate sector took a significant step back in 2023 as local and offshore investors remained on the sidelines.
CBRE’s latest Capital Flows report revealed that national investment volumes dropped by 31 percent year-on-year in 2023 to the amount of $24.1 billion. This was a result of repricing in some sectors which were continuing to limit deal flows.
Will 2024 present a different outlook from renewed opportunities and investor confidence?
It’s a question answered in the latest Talking Property episode where CBRE’s Stuart McCann, Head of International Capital & Capital Advisory, Pacific and Southeast Asia, and Tom Broderick, CBRE’s Australian Head of Capital Markets Research, looked at the sectors which global investors were eyeing in the Australian market.
“They were the only market where we saw a growth in investment,” explains Broderick. “North American investors invested about $1.6 billion last year and Singapore and Hong Kong were third and fourth at about $1 billion each. In terms of sectors, the living sector was by far the most favoured. About 39 percent of offshore investment was in that sector, followed by office at 24 percent.”
Speaking about his recent visit to the annual PERE Asia Real Estate Summit, a magnet for global capital, McCann had a positive outlook for Australia's year ahead.
“What we found is sentiment is getting increasingly more positive and it's quite a material shift since Q4 last year. I don't think we're getting ahead of ourselves just yet in terms of seeing that flow into transaction volumes, however capital definitely is increasingly forming the view that inflation now seems to be getting under control, particularly in Australia.
“During the conference, they announced the inflation print sitting at 3.4 percent - an important stat noting that the cash rate sits at 4.4 percent. It's the first time the inflation print has been inverted to the cash rate since 2016 and provides a lot more confidence around interest rates plateauing or even potentially commencing a process to gradually come down.
“Those with capital are feeling a lot more confident about deploying into the markets, particularly in Australia where the occupier markets are also performing very well.”
“Around the big APAC markets of Singapore and Hong Kong, we have found several large private equity groups that have completed very substantial capital raises. There is a lot of liquidity starting to build in the market now,” says McCann.
On the local front, Broderick says investors are seeing this as a huge buying opportunity.
“We typically don't go through one of these repricing phases very often; maybe on average once every 10 years. I think there's investors that are looking at asset classes like office and retail, where you can buy assets at a relatively deep discount with the expectation that pricing will start to recover and that'll really boost returns.”
“Particularly in strong markets like Sydney which has come through and in the financial core. The REITs have moved their cap rates for office out on average to 5.65 percent which is wider than retail. This is interesting and wider for the first time in a while.
“We think capital is seeing that the sector is repriced and looking quite attractive on a relative basis. I think that the capital will continue to come in for those reasons.
“It's coming through in our utilisation rates across the assets in terms of physical occupancy, particularly in markets like Brisbane and Sydney, which is supporting confidence around the future of the sector and the performance of the cash flows as well.”
Meanwhile, the positive sentiment in living sectors is a combination of investor groups looking to diversify their existing holdings at a time when the space is rapidly institutionalising.
“The government’s overseas migration strategy has seen a big influx of people moving into the country and it’s driving demand for that sector.
“We also see a chronic shortfall of stock that is being brought on across the main living sectors in the market. This creates a real deficit of supply which is going to support really strong rental growth in the living sectors across the board,” says McCann.
“For those reasons, the capital wants to work out a way to participate in that upside.”
CBRE’s latest Capital Flows report revealed that national investment volumes dropped by 31 percent year-on-year in 2023 to the amount of $24.1 billion. This was a result of repricing in some sectors which were continuing to limit deal flows.
Will 2024 present a different outlook from renewed opportunities and investor confidence?
It’s a question answered in the latest Talking Property episode where CBRE’s Stuart McCann, Head of International Capital & Capital Advisory, Pacific and Southeast Asia, and Tom Broderick, CBRE’s Australian Head of Capital Markets Research, looked at the sectors which global investors were eyeing in the Australian market.
Understanding the numbers
Capital flow into the country from 2023 found that offshore investment accounted for 25 percent or $6 billion across the five key sectors of office, retail, industrial, hotels and living. According to Broderick, the pullback in domestic and offshore investors reduced purchasing by about the same rate. A closer look at where the money was coming from showed that Japanese capital was the most active in the country with just over $2 billion invested into direct Australian real estate in 2023.“They were the only market where we saw a growth in investment,” explains Broderick. “North American investors invested about $1.6 billion last year and Singapore and Hong Kong were third and fourth at about $1 billion each. In terms of sectors, the living sector was by far the most favoured. About 39 percent of offshore investment was in that sector, followed by office at 24 percent.”
Current investor sentiment towards Australia
As CBRE's Head of International Capital and Capital Advisory for Pacific and Southeast Asia, McCann has an extensive real-time overview of what's happening with capital moving into both direct and indirect property investments.Speaking about his recent visit to the annual PERE Asia Real Estate Summit, a magnet for global capital, McCann had a positive outlook for Australia's year ahead.
“What we found is sentiment is getting increasingly more positive and it's quite a material shift since Q4 last year. I don't think we're getting ahead of ourselves just yet in terms of seeing that flow into transaction volumes, however capital definitely is increasingly forming the view that inflation now seems to be getting under control, particularly in Australia.
“During the conference, they announced the inflation print sitting at 3.4 percent - an important stat noting that the cash rate sits at 4.4 percent. It's the first time the inflation print has been inverted to the cash rate since 2016 and provides a lot more confidence around interest rates plateauing or even potentially commencing a process to gradually come down.
“Those with capital are feeling a lot more confident about deploying into the markets, particularly in Australia where the occupier markets are also performing very well.”
Investor risk appetite
One of the key findings from the capital flows report suggested that investors are starting to look further up the risk curve due to higher return hurdles.“Around the big APAC markets of Singapore and Hong Kong, we have found several large private equity groups that have completed very substantial capital raises. There is a lot of liquidity starting to build in the market now,” says McCann.
On the local front, Broderick says investors are seeing this as a huge buying opportunity.
“We typically don't go through one of these repricing phases very often; maybe on average once every 10 years. I think there's investors that are looking at asset classes like office and retail, where you can buy assets at a relatively deep discount with the expectation that pricing will start to recover and that'll really boost returns.”
Office and living sectors
With the investor radar starting to shift, there’s been talk about renewed interest in office. McCann agrees with this observation, highlighting the positive performance from Q4 and the second half of the year.“Particularly in strong markets like Sydney which has come through and in the financial core. The REITs have moved their cap rates for office out on average to 5.65 percent which is wider than retail. This is interesting and wider for the first time in a while.
“We think capital is seeing that the sector is repriced and looking quite attractive on a relative basis. I think that the capital will continue to come in for those reasons.
“It's coming through in our utilisation rates across the assets in terms of physical occupancy, particularly in markets like Brisbane and Sydney, which is supporting confidence around the future of the sector and the performance of the cash flows as well.”
Meanwhile, the positive sentiment in living sectors is a combination of investor groups looking to diversify their existing holdings at a time when the space is rapidly institutionalising.
“The government’s overseas migration strategy has seen a big influx of people moving into the country and it’s driving demand for that sector.
“We also see a chronic shortfall of stock that is being brought on across the main living sectors in the market. This creates a real deficit of supply which is going to support really strong rental growth in the living sectors across the board,” says McCann.
“For those reasons, the capital wants to work out a way to participate in that upside.”
