Commercial property investment remains strong, as offshore capital targets office, retail, industrial and hotel sectors

Colliers International releases 2016/17 Capital Markets Investment Review four-part series

Commercial property investment across the office, retail, industrial and hotel sectors remained buoyant in the 2016/2017 financial year, according to new reports from Colliers International.

The 2016/17 Capital Markets Investment Review series reveals offshore capital continues to flow into the Australian commercial marketplace, primarily targeting CBD office assets along the eastern seaboard, particularly in Sydney and Melbourne.

Investment across the office, retail, industrial and hotel sectors reached $28.99billion, with 28 per cent or $8.19billion of those sales attributed to foreign buyers.

Yield compression in each asset class will continue throughout the financial year ending (FYE) 2018, with limited stock creating competitive tension between investors and driving record prices.

According to the reports, New South Wales and Victoria are experiencing heightened demand for investment assets on the back of infrastructure development, population growth, rising rental rates and tightening yields.

Colliers International’s managing director of Capital Markets and Investment Services, John Marasco, said the strong demand conditions, as well as increased investment in infrastructure, had opened up opportunities for some of Australia’s premier developers to build the next generation of commercial assets.

“These development hot spots in Sydney and Melbourne will cement these cities’ reputations as globally competitive cities for both capital and tenants, and meet not only the current but also the future needs of occupants,” he said.

The lion’s share of 2016/17 investment sales was recorded in New South Wales, where combined investment across office, retail, industrial and hotel sectors totaled $12.51billion.

“Not surprisingly, the eastern powerhouse states of New South Wales and Victoria have again dominated sales volumes, with generally more assets to offload and greater appetite from buyers for CBD locations,” Mr Marasco said.

“New South Wales was the most dominant market, followed by Victoria, which recorded $8.33billion in investment across all four sectors.”

Queensland was responsible for $4.75billion worth of total investment, followed by Western Australia with more than $1.02billion, the Australian Capital Territory with more than $628.5million, and South Australia with more than $601.5million.

Anneke Thompson, Colliers International’s national director of Research, said one of the most notable trends this year was the increase in investment from offshore private investors, particularly in the office sector.

“Throughout the past financial year, offshore privates purchased $2.09billion worth of office stock, up 59 per cent from $855million the previous year,” she said.

“Of the $2.09billion in offshore private capital invested in Australian office markets, $1.05billion came from China. Private capital from Hong Kong and Singapore also increased dramatically, from $73million in the financial year ending in 2016 to $906million in 2017.”

Mrs Thompson said the influx in private capital could be explained by both the continued search for yield and the growing perception in the global investment community that Australian office property offered a “safe haven” investment environment.

“The improving leasing markets, particularly in Sydney and Melbourne, are also helping drive investor confidence in the outlook for capital appreciation of core office assets,” she said.

Please see below for a sector-by-sector analysis:


Throughout the past year, Australian office markets have continued to build on their growing global reputation as a relatively high-yielding asset with solid long-term fundamentals, attracting more offshore capital.

According to Colliers International’s 2016/17 Capital Markets Office Investment Review, the total transactional value for the FYE2017 was $13.2billion, with about 75 per cent of sales taking place in New South Wales and Victoria and offshore investors making 44.9 per cent of purchases.

Although transaction value is slightly down on last year (by $2.7billion), the FYE2016 included the $2.45billion sale of the Investa portfolio to China Investment Corporation.

Mr Marasco said it was important to note the impact population growth in Australia’s capital cities was having on transaction volumes, with the country growing by 1.89million people between the 2011 and 2016 Census.

“Both federal and state governments are now more focused on building infrastructure to help our cities cope with their growing size,” he said.

“These are key positive attributes for office markets, with both trends being felt most keenly in Sydney and Melbourne.”

Mr Marasco identified one of the more interesting trends in the past financial year as the volume of local private investors active on the buy side of transactions.

“Historically, private investors have been the ‘counter cyclical’ buyer, opportunistically acquiring assets with their larger equity pools once credit becomes tight,” he said.

“In this cycle, privates have joined the institutions on the search for yield, further elevating the competitiveness of both on- and off-market campaigns.”

The report goes on to highlight privates and institutions among the most active buyer profiles, and despite a dip in transactional value across the board, the FYE2017 resulted in the biggest purchasing volume by local privates since 2008, for a total of $1.90billion.

“One of the most significant examples of this was the Coombes family purchasing 28 O’Connell Street in Sydney for $91million in late 2016, contributing to a total of circa $2.23billion of office asset sales to private investors in Sydney for the financial year ending in 2017,” Mr Marasco said.

“In Melbourne, the Juilliard Group, a long-term family-run property investment group, purchased 825 Bourke Street in Docklands for $72.7million from Lendlease in late 2016.

“In terms of offshore capital, the most high-profile example was the $335million sale of 20 Bridge Street in Sydney, which sold to an individual from Hong Kong on a passing initial yield of 3.9 per cent.

“Local institutions, while still the second-largest buyer category behind offshore groups, have seen their volumes decrease throughout the past three years, highlighting the impact that the low interest rate environment is having, as well as the attractiveness of Australian office investments compared to alternative asset classes.”


The $6.64billion invested in Australian retail assets across the country in 2016/17 represented another strong year of activity for the sector, although 13 per cent down on the prior year’s $7.63billion.

As outlined in Colliers International’s 2016/17 Capital Markets Retail Investment Review, transaction volumes increased by 8.82 per cent in the same period, from 136 to 148, suggesting a lower average transaction value.

“The successful completion of several large-scale divestment programs in the prior year saw sales activity in the financial year ending 2017 rotate from sub-regional to neighbourhood centres, a theme that largely explains this year’s fall in both sales volume and average transaction price,” Colliers International’s head of Retail Investment Services, Lachlan MacGillivray, said.

Sydney, Melbourne, Brisbane and Adelaide each saw two transactions, with all eight occurring in the first half of the FYE2107.

By quantum, Melbourne comprised 32.29 per cent of all retail CBD sales, driven by two significant sales totalling almost $398million – the sale of St. Collins Lane for $247million on a reported yield of 5.25 per cent, and the Myer family’s divestment of their 33 per cent stake in Myer Bourke Street Mall for more than $151million on a yield of 4.50 per cent.

Sydney accounted for almost 31.62 per cent of all retail CBD sales, including the largest single transaction for the FYE2017, which was a 100 per cent interest in the David Jones building at 77 Market Street, purchased by Scentre Group and Cbus Property for $360million on a yield of 4.50 per cent.

Mr MacGillivray said unlisted institutions were the most active retail purchasers, accounting for 40 per cent of total transactions for more than $10million.

“We expect this trend to gather momentum due to increasing superannuation industry fund flows, the potential for increased direct property asset allocations, and the strong desire for superannuation funds to invest directly in super prime property assets,” he said.

“As the market continues to digest the implications of new retail entrants and the associated disruption, new capital will become more selective, targeting tier one or super prime assets that are ranked highly within their respective catchments.

“These centres will garner appeal based on increasing productivity levels, possession of compelling consumer offerings or advanced integration within a catchment’s social infrastructure framework.”

Investment volumes within the large format retail market were more than $851million throughout the FYE2017, accounting for almost 13 per cent of all retail transactions in the period, with the majority of activity occurring in New South Wales.

“Consolidation within the large format retail sector also gathered momentum throughout the financial year ending in 2017, with Aventus Property securing Home Hub assets in Castle Hill and Marsden Park,” Mr MacGillivray said.

“New benchmarks were set but this demonstrates the quantum of repricing that can occur when super prime assets come to market, providing acquirers with rare acquisition opportunities.”

The overall level of foreign activity in the retail sector moderated in the FYE2017, with 29 per cent or $1.93billion of acquisitions carried out by offshore buyers.

“Although this is a decline from the $2.35billion of offshore purchaser activity witnessed last year, it is somewhat commensurate with the small decline in overall transaction volumes,” Mr MacGillivray said.


The total transactional value of industrial investment assets was $6.1billion in the FYE2017, according to Colliers International’s 2016/17 Capital Markets Industrial Investment Review, another strong year for the sector, with much of the movement taking place in Victoria, New South Wales and Queensland.

Transactions included the largest single industrial asset sold in Queensland’s history, Charter Hall’s purchase of the 81,000sqm Coca-Cola Amatil campus for $156million on a 20-year triple-net lease. Charter Hall’s divestment of its four-asset portolio to Blackstone for $126million was another notable deal in the FYE2017.

As in the office, retail and hotel sectors, the share of offshore buyers in the industrial property market has increased during the past few years.

“Offshore buyers represented about 35 per cent of Australia’s industrial investment sales volume, up from 24 per cent in 2014/15 and 29 per cent in 2015/16, with the bulk of offshore capital coming from the United States and Singapore,” Colliers International’s managing director for Industrial, Malcom Tyson, said.

“Offshore buyers have increased their footprint into the Australian industrial and logistics market, enticed by the healthy returns and relative confidence in Australian assets.

“However, as was the case last year, the offshore values of sales would likely be understated given the sizeable level of offshore capital being deployed via domestic operators.”

In an ensuing trend from the FYE2016, infrastructure investment and economic prosperity are playing major parts in the industrial and logistics sectors.

“Eastern seaboard infrastucture is driving investment volumes now and moving forward, with industrial sales concentrated in Queensland, New South Wales and Victoria for a total of 88 per cent,” Mr Tyson said.

“This strongly correlates with the amount of infrastructure investment promised by the federal government in line with the 2017/18 budget, which has made a $75billion commitment to fund and finance infrastructure projects through the next 10 years.

“The new Bruce Highway, Melbourne to Brisbane inland rail and Western Sydney Airport are among infrastructure projects in the medium- to long-term pipeline and naturally, these developments continue to boost confidence in the industrial and logistics sectors.”

Mr Tyson said competition for industrial assets was anticipated to become more fierce in the next three years, with a thin supply pipeline until 2020, and portfolio sales comprising more than one third of total investment sales for almost $2billion.

“Most new stock coming online is being readily absorbed in the market and limited supply of industrial stock is expected to be delivered, despite strong demand for new industrial space,” he said.

“Currently the weight of demand is being met by portfolios, as they offer both scale and diversity by geography and tenant mix – and not surprisingly, about 60 per cent of the total portfolio sale volume for the financial year ending 2017 involved offshore purchasers.”


The Australian hotel market continues to attract strong levels of foreign capital, led by buyers from Asia, but both domestic and international investors regard Australia as relatively low risk and a highly transparent market.

According to Colliers International’s 2016/17 Capital Markets Hotels Investment Review, capital was primarily sourced from China, with Chinese investors purchasing 13 hotels for a total of $1.12billion. The $439million in domestic capital accounted for 14 per cent of total investment.

The total hotel transaction volume in the FYE2017 for sales more than $5million came to $3.05billion, with most activity taking place in New South Wales (42 per cent), closely followed by Victoria (39 per cent).

“There is little doubt that Australian hotels are highly regarded,” Colliers International’s head of Hotels, Gus Moors, said.

“Australia is benefiting from increased Asian inbound arrivals, as well as strong domestic demand, and we have started to see domestic and offshore capital enquiring on well-located regional or unique assets across New South Wales, Victoria and Queensland.

“As a result, we are seeing an increase in transactions occurring in areas outside of the capital cities and major resort markets.”

As outlined in the report, the Australian hotel sector has a long history of attracting offshore capital, particularly from Southeast Asian countries.

“During the past three years, this has been supplemented by the Chinese market, who are attracted by Australia’s stable economic performance, property cooling measures in their home markets, and our relatively high-yielding freehold assets,” Mr Moors said.

Mr Moors said opportunities to acquire established premium accommodation stock in the eastern seaboard capital cities was expected to remain limited throughout the coming year, which would fuel investor demand and compress yields even further.

“We anticipate that the performance of hotels in Sydney CBD will continue to be strong,” he said.

“With occupancy levels largely at their extremes, growth should be realised in Average Room Rates, and with very limited new supply entering the market, the opportunity for revenue retention and profitability are strong.

“We anticipate limited buying opportunities, however, as Sydney is likely to continue to be a tightly held market.

“Melbourne hotel performance levels remain strong, although have not matched the year-on-year growth levels of Sydney. Brisbane and Perth will need to absorb incoming supply but do present some counter-cyclical buying opportunities.”

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