Australia is fast becoming the darling of the Asia Pacific office market with JLL’s latest Australian Office Investment Review & Outlook painting a very positive outlook for the country’s major office markets.
The report shows the Australian national CBD office market vacancy rate trended down in 2016 to 11.9 percent with Sydney (7.7 percent) and Melbourne (8.1 percent) the tightest CBD office markets.
Within the Asia Pacific region, Hong Kong is the only primary office locale that can hold a candle to Australia’s two largest office markets for rental growth. It reported year-on-year growth of 9.6 percent, but the outlook is for slowing growth.
“The Australian leasing market recovery gathered momentum in 2016,” says Andrew Ballantyne, JLL’s Head of Research – Australia. “We recorded a second successive year of positive net absorption (326,200 sqm) across the six monitored CBD office markets.”
Asian investors have noted the strength of Australia’s office markets, and have moved to secure assets.
“Offshore investors accounted for 42 percent of total office transactions in 2016 (AUD 6.19 billion),” Ballantyne says. “However, offshore investors were active on both sides of the ledger, with AUD 3.75 billion of real estate divested in 2016.”
Michael Zhang, JLL’s Head of China Desk – Australia, says Australia’s office markets were amongst the better performers during the GFC.
“They defended well against global systematic shock and, as such, are viewed as a safe investment destination,” he says. “Many Asian investors have allocated investment budget for Australia and there are likely to be an increasing in investment volume in the short to medium term.”
Offshore investment in Australia’s office market over 2016 was dominated by three major countries of origin: China, Singapore, and the US.
Chinese investors were the most active offshore group, accounting for 25 percent of the AUD 6.19 billion acquired by offshore investors. Chinese investment was largely concentrated in NSW and Victoria, and was a mix of office investment and the acquisition of office assets with the potential for residential conversion.
Zhang says Chinese investors view Australia’s office market as an attractive and viable long term investment destination.
“Australia is particularly attractive to Chinese investors due to its mature market, stable legal system and political environment, its proximity to China, plus its similar time zone,” he says. “Most importantly, the level of investment returns for Australian office assets are amongst the best in the world, and will continue to outperform most Asian office markets over the next three years.”
“We expect more Chinese investors will invest into the Australian office markets in the short to medium term.”
Singaporean investors have also increased their exposure to Australia, accounting for 24 percent of offshore acquisitions.
“Singaporean capital is more diverse than Chinese capital, with acquisitions in Sydney, Melbourne, Brisbane, and Perth,” Ballantyne adds.
The outlook for Australia’s office markets is positive: JLL forecasts prime net effective rents will rise by 34.9 percent in Sydney and 18.7 percent in Melbourne between 2017 and 2019. While this will undoubtedly draw more Asian investors to the market, some will still have cause for caution.
“Currency risk is a big part of investment considerations for most Asian investors, especially the Chinese purchasers,” Zhang says. “Many of them are cautious about entering the Australian market, or are considering timing of entry because of foreign exchange consideration.”