Offshore capital will continue to target Australian real estate this year, with new capital sources and destinations in play.
The ANZ/Property Council Quarterly Survey for the first quarter of this year found more respondents expecting foreign investors to buy commercial property, especially hotels. The survey, which takes answers from 1,100 respondents each quarter, predicts foreign investors will carry out 19.2 percent of office deals and 21.9 percent of hotel deals, a slight increase from the last quarter of 2017.
The latest JLL data shows Singaporean investors were the most active offshore players in Australia in 2017, spending US$2.475 billion. Chinese investors spent US$1.37 billion, U.S. investors US$1.26 billion, while Hong Kong investors spent US$944 million. Overall, foreign investors accounted for 36 percent of Australian commercial property transactions throughout the year.
“Singaporean investors continue to remain Australia’s largest source of foreign capital in our office markets and in 2017, we saw a clear trend from some of the major groups to broaden their investment mandates to include more markets, beyond the traditional focus of Sydney and Melbourne,” says Stuart McCann, JLL’s Head of International Capital for Australia.
Singaporean groups were responsible for the largest office transactions in not just the Melbourne CBD, but also in Brisbane, Adelaide and Perth, he said.
Despite Beijing introducing restrictions on outbound capital, JLL expects demand from China to remain strong.
“Despite restrictions, we saw a significant amount of acquisitions from Chinese groups, however, this was largely driven by corporates and high net worth private investors, with capital reserves offshore” says McCann.
UK, Australia and the U.S. are expected to remain the top three destinations for Chinese offshore real estate investments, he said.
However, JLL believes some Chinese groups will also look to sell overseas assets in order to repatriate capital. The divestment trend has already been shown in Australia with HNA Group recently selling 1 York Street, Sydney to Blackstone Group for A$205 million.
Japanese investors spent over A$1.6 billion in Australia last year and JLL expects them to become a more dominant force over the next few years. Japan has some of the largest pools of savings in the world and has a negative interest rate environment, which is resulting in Japanese investors looking offshore for yield and for diversification benefits.
McCann says: “In 2017, there was a resurgence in Japanese capital looking into the Australian market, with A$1.6 billion of transactions being completed, which is triple the previous eight years combined. While a large proportion of these transactions were completed by one major investor, we are working with a large number of other Japanese groups which are looking to invest into the market.”
He predicts “Hong Kong investors will remain aggressive for the right opportunities” as prices there have risen sharply and prime yields compressed to below three percent, driving investors overseas to seek better-priced opportunities.
U.S. investors have been largely underweight Australia and as a result, there has been an increase in transaction volumes during 2017 to around U$1.2 billion, says McCann. The majority of the U.S. investors are using core, core-plus and value-add funds as the main vessel to deploy capital into Australia.
Singaporean investors have been amongst the first to look at more markets in Australia and the ANZ/PCA report also shows growing foreign interest outside of Sydney.
In particular, the report noted an increase in confidence in Western Australia and Victoria. Respondents expect offshore investors to account for a larger percentage of retail, residential and hotel deals in Victoria than in New South Wales, with 28.6 percent of hotel deals to be completed by foreign capital.
Daniel Gradwell, economist at ANZ, says: “In Western Australia the worst of the downturn is behind us and we are seeing signs of a recovery and jobs being created. There has been increased activity in the mining sector but tourism is also showing strong growth.
“New South Wales has been the strongest economy for a couple of years but now Victoria is really booming. As we have seen in prior cycles, when prices rise in Sydney, more investors turn to Melbourne and also Brisbane to take advantage of better pricing.”
Overseas investors have also been keen buyers of Australian agricultural land in recent years, with interest from Chinese investors garnering headlines. It’s not just Chinese investors that are interested in Australian farmland, Will Gurry, Head of Agribusiness at JLL Australia says. “While Chinese and Asian investment attracts a lot of media coverage, we are seeing as much, if not more, transactional activity from European and American based investment groups.”
The Australian government introduced new measures in February which require sellers of farmland worth over A$15 million to prove they spent a month marketing it solely to domestic investors before seeking interest from overseas.
Gurry says: “It is difficult to quantify the effect the new measures will have in the marketplace, however we are aware of current deals on which the new ruling has had a significant disruptive and delaying impact. On the face of the ruling, it appears that it will be more difficult for offshore investors to purchase Australia agricultural assets in a discrete or private manner.”
In the longer term, he does not expect the changes to hit pricing. “The new rules may affect individual transactions, particularly current deals under negotiation, however in our view they are unlikely to have a major effect on land value over the longer term.”
Click to read more about investment into Australian real estate.