Where to invest in Australia

What type of investor are you? Are you a conformist? Are you contrarian? Or do you have a ‘vintage’ investment strategy? 

Wherever you sit on that spectrum, CBRE’s Global Head of Investor Thought Leadership Henry Chin has his top picks for where you should invest in Australia – some of which may surprise you.

Chin shared his thoughts at a Sydney client event on his latest visit Down Under.

His macro view: “Within Asia Pacific we will not have a recession. Growth will be below historical averages, but strong growth in mainland China will help Australia’s economy grow.

At a property level, he is adamant that repricing needs to occur across the Asia Pacific region if commercial property investment activity is to re-start.

Notes Chin, “Our recent APAC Cap Rate Survey showed that clients are currently considering three main factors. If you compare this latest survey to the results from Q3 last year, there has been a huge uptick in terms of the cost and availability of financing. The second biggest issue is that buyers and sellers expectations are too far apart and yield expansion is yet to be realised.”

Australia, Hong Kong and Singapore are the markets facing the biggest issue in this regard, says Chin.

“Every single investor I’ve been talking to say Japan, Singapore and Australia are their key focus. The only reason why they don’t want to come to Australia is on the pricing side.”

However, there is plenty of dry powder, whether you’re a conformist, contrarian or vintage investor – which brings us to Chin’s top picks.

The Conformist

• Alternatives: There’s a structural tailwind to support demand so alternative assets provide good medium to long term investment potential. Chin’s top pick is Life Sciences, which is still a relatively small asset class in APAC, compared to the U.S., but one set to experience significant growth in Australia spurred by rising health challenges and demand from the major pharmaceutical occupiers.
  
  In the alternative space, Chin’s also a fan of hotels following a full recovery in domestic tourism in Australia and with international tourism set to fully recover by 2025. His third pick is student accommodation given the strong rebound in student arrivals, which will benefit education facilities, student housing, the build-to-sell and build-to-rent sectors.
• Logistics assets: They’ve been top of investor buy lists and they’re still a good bet in Australia in  cities where double digit rent growth is projected, offsetting the higher cost of debt. But Chin advises that occupiers are looking for the best quality assets in the best locations, so this needs to be factored into decision making. 
• Build-to-rent: “The fundamental demand is going to be very, very strong,” says Chin, who points to the results from CBRE’s latest Live, Work, Shop survey. It shows that up to one-third of the Australian respondents want to move, with 53% wanting to be closer to city centres in better quality buildings with a better sense of community.

The Contrarian 

• Sell logistics assets: They’re an investor darling but Chin points to the spread between prime yields and borrowing costs. By selling, contrarian investors can realise returns and lock in profits before cap rates expand. He also recommends prioritising the disposal of assets with short-term refinancing risk.
• Buy offices in select markets: “My number one pick, if you play the cycle as of now, is the Sydney office market,” says Chin. “If you look at the Sydney and Melbourne context over the last 15 years,  investing into Sydney and Melbourne office does give you a great diversification benefit.” Chin says good quality buildings with ESG credentials will outperform, with Sydney office rental growth due to come through this year. Putting Sydney office assets into your global or APAC portfolio will enhance returns and reduce your volatility. But pricing remains an issue.
• Retail: You need to play the cycle here too. CBRE’s latest Retail Flash survey shows 83% of the Australian retailer respondents want to expand. While retailers are still struggling, Chin says they’ve recognised that now is the time to expand because they can get better quality buildings at lower prices. Most want to expand in prime high street location as tourists and office workers return. With many markets bottoming out, Chin says retail investment is making a come-back. And, unlike in the office sector, the re-pricing pain has already occurred.

The Vintage Investor 

• Consider the public markets:  Consider REITS, most of which are trading below their Net Asset Value (NAV) in Australia, as well as other listed vehicles that are seen as undervalued.
• Target returns from debt: Chin says debt investment is more attractive during times of uncertainty and a rising interest rate environment. Take a look at senior to junior loans in Australia, Korea, Singapore and India, as well as potential distressed opportunities in mainland China and re-financing risk in Koren, Hong Kong SAR, Singapore and Australia.
• Buy the best assets globally: Buy the best quality assets in gateway cities as they are expected to go from trading at 5% to 10% premiums to book value to a potential decline of 5% to 10%. Chin also advises that during previous downturns, the buying window of opportunity in APAC for these types of assets has been relatively short.

So how do you decide where you sit on the spectrum?

“If you’re a core investor you should probably stay with the conformist view, if you’re value-add, probably I would go for the contrarian view, but if you are opportunistic capital I would go for the vintage approach,” Chin concludes.

You can hear more from Dr. Chin in an upcoming CBRE Talking Property podcast where he’ll discuss his key observations from his Australian visit and the top questions he’s receiving from investors.