Sydney now the third most popular destination for global offshore investors.
Investment in commercial property across the retail, industrial and office sectors was at a record high in the 2014/15 year, according to the Colliers International Australian Investment Review launched this week. Across the three sectors, the overall investment activity was up 19% from the 2013/14 year, at a record $28.88 billion.
“Transaction volumes across the industry are up, as both offshore and domestic investors demonstrate a continuing strong appetite for Australian commercial property,” said John Marasco, Managing Director of Capital Markets and Investment Services at Colliers International. “The low interest rate environment, the falling Australian dollar and our stable economy have combined to create optimum conditions for Australian commercial property. The strong performance of the sector in recent years, and the potential for continuing growth have made more offshore investors consider the Australian market for the first time. At the same time, conditions for domestic investors have also been positive, so together demand for commercial property assets is at an all-time high.”
These factors have led to Sydney becoming the third most popular destination for global offshore investors, behind London and Manhattan, and ahead of Shanghai and Paris.
Source: Colliers Edge
London is still the leading destination for global offshore capital, benefitting from $28.7 billion, with Manhattan the recipient of $12.2 billion, while global capital inflows to Sydney total $5.1 billion.
According to the research, offshore capital partnering with domestic managers is an ongoing trend that is becoming more prevalent, across all sectors.
“Offshore capital partnering is becoming more and more common, and not just in the office sector,” said Mr Marasco. “We are increasingly seeing this trend in the industrial sector, and we’re aware it may also become more prevalent in the retail sector as well.
“Perhaps the greatest challenge for the industry is the lack of stock coming to market. Demand is certainly outweighing supply at present, and limited new supply is leading to yield compression across the board. “
More than $15 billion worth of assets transacted in the office sector throughout the year, up 7% on the previous year. Capital partnering was a key theme in the office sector, a trend that has been popular for several years now. However, a notable new player in the office sector was the rise of the offshore private investor, particularly those from mainland China and Hong Kong, who purchased $1.11 billion worth of office assets in the 2014/2015 year.
“Improving tenant demand is providing further confidence to the investor market,” said Mr Marasco. “This is fuelling strong interest in our office market from both domestic and offshore investors, many of whom are new to this market. Global sovereign wealth funds are increasingly turning their attention to the Australian office market, and this in turn is driving increasing demand which is putting yields across all office grades under pressure.”
The largest transaction of the 2014/15 financial year was the sale of 62.5% of T1 at Barangaroo to Qatar Investment Authority (QIA) and Australian Prime Property Fund (APPF) Commercial for a total of $875 million, which occurred in the final days of the financial year. However, this has more recently been eclipsed by CIC’s acquisition of the Investa Property Trust in late July for approximately $2.5 billion.
$6.45 billion in assets changed hands throughout 2014/2015, up 56% on the previous year. The logistics and transport industries are the driving force in the sector at present, which is experiencing low vacancy and limited new supply. Offshore investors purchased $2.63 billion worth of Australian industrial property throughout the year, equivalent to 41% of all transactions for the sector.
“REITS, super funds and sovereign wealth funds have all been active buyers in the industrial sector,” said Malcom Tyson, Managing Director of Industrial at Colliers International. “Private investors have been net sellers as they seize the opportunity presented by the current market conditions and strong demand for quality industrial property. Yields in the Australian industrial market are still more favourable than those of other international markets, so global buyers will continue to seek opportunities in this market.”
The largest sale was the $253 million sale of the Coles Chilled Distribution Centre in Eastern Creek, brokered by Colliers International. The sale of large scale industrial portfolios was another key theme seen in the sector throughout the year.
$7.541 billion worth of assets traded in the retail sector over the 2014/15 financial year. This was up 24% on the previous year. There was a 26% increase in the number of transactions throughout the year, which stood at 157 sales in total. More than half of these sales were in the $10 million to $30 million price bracket, with private investors highly active vendors, taking advantage of the current strong market conditions.
“The improving retail trading conditions are fuelling further confidence in retail investors,” said Lachlan MacGillivray, Head of Retail Investment Services at Colliers International. “A lack of supply and record levels of demand for high performing assets are contributing to yield compression. However, this has not deterred investors, particularly those from offshore, who accounted for 16% of all transactions in the sector, showing a particularly strong interest for assets with development potential.”
The largest single asset transaction during 2014/15 was the sale of Mt Ommaney Centre
for $416.25 million in October 2014. The asset was acquired by US-based TIAA Henderson Real Estate and Federation Centres from AMP Capital.
Looking forward, the market outlook for each sector for the remainder of 2015 is:
Australia’s low interest rate environment and the falling Australian dollar will continue to drive the office market, as more owners move to capitalise on favourable selling conditions. A wide range of purchaser types, from local superannuation funds to offshore investors from Asia, Europe Canada and the USA, will continue to invest in Australia.
“Offshore capital looking for investment opportunities in Australia will continue, more broadly, to be the underlying driver of demand and yield compression in our major eastern seaboard markets,” Mr Marasco said. “While European, South Korean, American and Canadian pension funds are already active in our markets, we see the emergence of Chinese insurance companies into the Australian market as potentially increasing further the volume of capital looking for core and core plus assets.
“Overall, we expect that the continued influx of foreign capital more generally will set Australian office markets on a path of continued yield compression throughout the next year at least. These major buyers, however, have mandates for only the very best assets in their target markets, so we expect compression to be felt most strongly at the premium and A Grade end.
“Local private investors and smaller cap institutions will target less crowded metropolitan markets for yields, as they have done over the past year. This will drive continued strong demand in popular markets such as Parramatta, St Leonards and North Sydney in New South Wales and Fortitude Valley in Brisbane.”
The strong sales environment is expected to persist, based on the favourable spread between prime industrial yields and the 10 year bond rate. “Strong capital returns, freehold titles and sizeable population and employment growth are all contributing to a market with solid fundamentals that will continue to experience strong buyer demand,” said Mr Tyson.
Further yield compression is expected, driven by a pricing disconnect between prime office and retail. “This disconnect is being driven by a lack of availability of premium grade investment product in retail, in contrast to the office sector which is experiencing a steady supply and subsequently a competitive bidding processes,” said Mr MacGillivray. “Therefore, we expect to see record pricing for any quality retail assets that come to market. “