Talking Property | Show Me the Money

KH:
Hello and welcome to Talking Property with CBRE. I'm Kathryn House, your podcast host, and today I'm chatting to some of CBRE's leading capital markets experts, Stuart McCann and Tom Broderick. We'll be discussing the offshore capital that's been coming into the Australian property market, where the money's coming from and how that's changed in the past six months. We'll be doing a market pulse check, talking about the latest insights from clients and covering off on what to expect in the year ahead. So Tom, as CBRE's Australian Head of Capital Markets Research, you recently crunched the numbers on the capital coming into Australia. Can you walk us through the numbers, some of the key trends you've identified and give us a bit of an idea of how offshore capital flows compare to what we're seeing in the domestic market? 

TB:
Yes, sure Kathryn. So total volumes across Australia were down about 31% last year to a bit over $24 billion worth of investment. That was across the five key sectors that we track. So office, retail, industrial, hotels, and now living, which is BTR, student accommodation, etc. Of that, offshore investment accounted for about 25% or $6 billion in 2023, and that was also about a 31% drop year on year. So basically domestic and offshore investors reduced purchasing by about the same rate. In terms of source markets, Japanese capital was the most active. They invested just over $2 billion into direct Australian real estate last year. They were the only market where we saw a growth in investment. North American investors invested about $1.6 billion last year and Singapore and Hong Kong were third and fourth at about a billion each. In terms of sectors, the living sector was by far the most favoured. About 39% of offshore investment was in that sector, followed by office at 24% 

KH:
And there was a big switch, wasn't there with Japan taking over as number one? The level of investment from that country was up considerably on the year prior? 

TB:
Yes, it was and they're at a bit of a competitive advantage compared to other investors in the market given interest rates haven't moved, whereas we all know that they've significantly increased for domestic investors. 

KH:
Stuart, probably a good time to go to you. As CBRE's Head of International Capital and Capital Advisory for Pacific and Southeast Asia. You have a real helicopter view of what's happening in terms of capital flowing into both direct and indirect property investments. You've also had what seems like half the world in Singapore recently for the annual PERE Asia Real Estate Summit and the first AHICE Southeast Asia Hotel Conference. Can you share some of your insights? I was interested to hear that PERE included a 'Why Australia' section in their summit. 

SM:
Yes, Kathryn, I mean last week was a huge week for global capital to descend on Singapore from basically everywhere. What we found is sentiment is getting increasingly more positive and it's quite a material shift in sentiment that we've seen 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, but I think what the capital definitely recognises is that inflation now seems to be getting quite under control, particularly in Australia. It was only during the conference that they announced the inflation print sitting at 3.4% and that is actually quite an important stat noting that the cash rate sits at 4.4%. So it's actually the first time the inflation print has gone inverted to the cash rate since 2016. 

So I think capital is taking a lot of confidence in what that means for cap rate decompression. I think it gives them a lot of confidence about what that means for the outlook for where interest rates are going to plateau or potentially over time come back down. And I think what that means is that for those that have got capital, they're feeling a lot more confident about deploying it into the markets, particularly Australia where the occupier markets are performing very well. I would say though we do see liquidity being patchy. So we do see positive liquidity coming in from some of the big GP's who have got and raised large amounts of capital and are sitting on it and are needing to deploy it. We're seeing private capital from North Asia and Singapore and Japan starting to turn up and be quite active and wanting to take advantage of the cap rate movements that have played out on the ground. 

But where we are seeing it being a little bit more diverse is certainly across the the LP universe. So if we think about the LPs coming through from Asia Pacific, they're generally underweight real estate and so they're turning up to be quite an active source of capital. But if we then compare it to the LPs coming through from Europe and the US where they're really at weight to their real estate allocations, a lot of them are telling us they need to sell real estate to be able to redeploy it and so they can manage their allocation position to the sector. So while positive in terms of the outlook in terms of where inflation and interest rates sit, we're certainly confident around what that means for deal flow, but the liquidity does remain patchy and we expect that to maintain. 

KH:
So I was actually talking to one of our researchers who was up in Singapore this month and she was saying that there was talk about office coming back on the radar. I know that's probably the big elephant in the room, what's happening with office, but is that the sense that you’re getting Stuart? 

SM:
Definitely. I think the data over Q4 and the second half of the year, particularly in your strong markets like Sydney has come through and in the financial core particularly it's actually performed really well. So that's a tick. I think you've seen the REITs move their cap rates for office out on average to 5.65%, that's actually wider than retail, which we think is interesting and it's actually wider for the first time in quite some time. And so we think capital is seeing that the sector is repriced and looking quite attractive on a relative basis. And so for those reasons I think that the capital will continue to come in. And I also think it's coming through in our utilisation rates across the assets in terms of physical occupancy, again, particularly in markets like Brisbane and Sydney, which is again supporting confidence around the future of the sector and the performance of the cash flows as well. 

KH:
So we've talked about office, perhaps we could switch tracks to talk about the living sector. In looking at Tom's recent Capital Flows report, the largest share of offshore money went into living sector investments last year. Do you see that momentum continuing, and why do you think there has been such a big focus on that particular market sector? 

SM:
Look, I think groups are generally looking to diversify their existing holdings and living is institutionalising quite rapidly. I also think that the overseas migration strategy by the government, which has seen such a big influx of people moving and migrating into the country, is driving demand for that sector. We also see a chronic shortfall of stock that can be brought on across the main living sectors in the market, which is creating a real deficit of supply which is going to support really strong rental growth into the living sectors across the board. I think for those reasons, the capital wants to work out a way to participate in that upside. 

KH:
Another aspect of the capital flows report that sparked my interest was the suggestion that investors are starting to look further up the risk curve. Probably a question for both you Tom, and Stuart. Do you think this is happening across the board or is it more of an offshore or local phenomenon? 

SM:
It's interesting. We're seeing a lot of capital wanting to buy core and core plus assets at value-add returns, but effectively we don't see vendors tolerating that to much of a degree going forward. But what we have found is, and having sort of just been around the big markets of Singapore and also particularly Hong Kong, the number of large private equity groups that have gone and raised value add capital at the moment is very, very substantial. And so there is a lot of liquidity in the market at this point in time by those big fund managers that are sitting on big fresh capital raises and are looking for product. That's where we're seeing some of the deepest levels of liquidity in the market at the moment. They do find it challenging to be able to deliver on those returns, but nonetheless, quite deep liquidity from that sector at the moment. 

KH:
And what are you finding Tom locally? 

TB:
I think a lot of investors are seeing this as a huge buying opportunity. We typically don't go through one of these repricing phases, maybe average once every 10 years. So I think there's investors that are looking at asset classes like office that we've already spoken about 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. 

KH:
Another question for you Tom. In CBRE's 2024 Market Outlook report, we've tipped a 3% increase in Australian commercial property transaction activity this year ahead of a 37% increase in 2025 and a lot more upside if interest rate movements are favourable. Do you think that will shift the balance and bring more domestic investors back into the market? 

TB:
One of our favourite words at this time of year is cautiously optimistic. I think that's very relevant this year. To Stu's point, the interest rate outlook has significantly improved in Australia, over the last three months. Every inflation print has been slightly better than the market expected and so that's causing investors to bet on rate cuts by the end of the year, which obviously helps in the capital market space. One thing that we just need to be mindful of though is the recovery phase does take some time. So for example, after the GFC, it took six years for Australian volumes to recover to pre-GFC levels and capital values actually took longer. It took about seven years for pricing to recover in the office market, for instance, back to pre-GFC levels. So it does take a while, but I think certainly there is some improved optimism both for offshore investors, but also some domestic investors who have been largely on the sidelines, are seeing maybe the end of this year as a bit of a buying opportunity. 

KH:
Have you got any thoughts on that front, Stuart? 

SM:
Look, I think that the domestic investors will see the outlook for rate cuts as an opportunity to start to move forward with some of their deployment strategies. And clearly they have a great opportunity right now while the offshore community is not back in full force to take advantage of that environment where there is less liquidity in the system. In saying that, what we're seeing from a capital deployment standpoint domestically is a lot of the Australian super funds will likely take the charge there. And what we've seen from their mandates is that they are looking to rotate and reweight their portfolios away from the traditional sectors of office and retail and really look to increase their exposure particularly into logistics, and we saw a number of big trades by the big superannuation funds last year. They were actually the bigger buyers of logistics in the country. But also as they looked to increase their exposure to the living sectors, whether it be through affordable housing, social housing strategies or build-to-rent strategies as well. 

KH:
And Stuart, one more question I'd like to throw to you. In your role you cover off on both direct and indirect property investments. Are you seeing that there's more activity in one or the other at the moment? Are people more looking at direct investments or is there more interest in indirect property opportunities? 

SM:
Look, definitely what we're seeing is, from an indirect perspective, that big investors, whether the big super funds locally or the big offshore pension and sovereign capital, they are wanting to establish strategic relationships with great quality developers and fund managers on the ground who they can work with and and build serious scale. So what we are seeing is that if we can put together highly strategic capital partnership opportunities to the big global investors and get these established and there is a pathway to delivering scale through leveraging that developer's pipeline or that manager's existing footprint of assets, then that is increasingly making it strategic and motivated to deploy capital  into the market at the moment. 

KH:
I really appreciate you taking the time out today, Stuart and Tom. It's clearly going to be an interesting year on the capital markets front and I think everyone is laser focused on how market conditions will evolve moving into 2025. Thanks for tuning into this latest episode of Talking Property with CBRE. You can find a link to CBRE's Capital Flows report in the show notes. If you like the show and want to check out more, visit cbre.com.au/talking-property or subscribe through Spotify, Apple Podcasts or your favorite podcast hosting platform. I'd also love to hear from you with questions, feedback, or ideas for future podcasts. You can email me via [email protected]. Until next time.