A beacon for global investors

Published September 15, 2011

A beacon for global investors

With domestic competition for prime grade commercial property in Australia much reduced, it's an environment tailor-made for investors to enter the market, says KEVIN STANLEY

NOW is a special time in Australian real estate history. Commercial property yields are among the highest in the world, held that way thanks to a high cost of debt, while risk remains low by global standards, with an economic outlook supported by strongly growing Asian countries.

At the same time, domestic competition for prime grade real estate is much reduced compared to three to five years ago, when Australia-listed real estate investment trusts (A-Reits) were buying up to 60 per cent of all investment grade properties. A-Reits represent no more than 25 per cent of purchases now and don't look like they'll be back in the market in a big way anytime soon. It's an environment tailor-made for foreign investors to enter.

And so it is, with foreign investment in Australian commercial real estate stepping up appreciably through the course of this year. In Q1 2011, foreign investment accounted for just 4 per cent of purchases in a slow start to the investment year. By Q2, transaction activity had picked up and offshore investors accounted for 34 per cent of all purchases. Now, with Q3 two months in, foreign investment accounts for 48 per cent of all turnover by value. The long-term average foreign investment in Australia is closer to just 10-15 per cent.

It seems as global uncertainty rises, so too does interest in investing in Australian commercial real estate. Australia's 'safe haven' status is growing by the week.

Interestingly, the major source of funds for Australian commercial real estate has switched from Europe during and immediately after the Global Financial Crisis, to Asia now. In turn, Asian investment in Australia has shifted substantially in motive and type over the last 20 years. In the 1990s, it was private investors, especially from Hong Kong and Singapore, who weighed heavily into Melbourne and Sydney, searching for capital values low in the cycle, only to wait and trade out progressively over the next decade or so and take handsome profits.

Singapore has now emerged as the single largest source of foreign funds purchasing Australian commercial real estate. So far this year, Singaporeans have purchased 17 per cent of all Australian commercial real estate (from a total A$5.9 billion or S$7.55 billion).

But this time around, it's a new breed of Asian institutions doing most of the buying - pension funds, Reits, sovereign wealth funds, property fund managers, along with the now more occasional private investor. And now, the motive is more centred on stability and security of income, rather than just searching for a low entry point at or close to the bottom of the pricing cycle. As a result, the hold-period is likely to be much longer than traditionally seen from Asian investors.

The role of Singapore is proving central in this investment trend. Singapore has now emerged as the single largest source of foreign funds purchasing Australian commercial real estate. So far this year, Singaporeans have purchased 17 per cent of all Australian commercial real estate (from a total A$5.9 billion or S$7.55 billion). Of all the foreign investors, Singaporean-based entities represented a significant 51 per cent of purchasers.

But the influence of Singapore is stretching well outside the city state, with fund managers raising capital from a wide and growing investor base such as Malaysia, Indonesia and beyond. Given the growth in wealth and savings throughout Asia and the obvious links between Asia and the Pacific, we may be at the beginning of a very long-term trend. Institutional and private investors from Malaysia, China and South Korea have also purchased directly in Australia to date, and remain interested in further purchases.

While Singapore may be the largest single source of funds investing in Australia, there are other global sources too. First-time private and institutional investors from North America accounted for 10 per cent of all purchases in 2011 year-to-date, despite the high value of the Australian dollar. European-based funds and private investors already familiar with Australia are still making the occasional acquisition, while South African money is also finding its way for the first time into office, industrial and retail property, predominantly in the major east coast markets.

And why wouldn't you invest in Australia? While the country has its challenges, compared to the rest of the world, the fundamentals of the economy and financial markets remain in very good shape. This will underpin a gradual recovery in all aspects of the commercial property markets. Add to this the famous transparency and ease of doing property business in Australia and the choice to look Down Under is obvious.

It looks like the beacon will be burning brightly for many years to come.

The writer is executive director, Global Research and Consulting, Asia Pacific, CB Richard Ellis