The number of foreign investment groups active in the Australian commercial property market hit a record 87 in 2016, jumping from the mere 7 recorded in 2006.
The stats, which come from recent analysis by JLL, show the U.S., Singapore and China dominating the country’s major commercial sales in 2016, accounting for 40 percent, 23 percent and 16 percent respectively.
Offshore investors have acquired AU$26.6 billion of Australian commercial property on a net basis over the last 10 years and, while investors are targeting assets across sectors, office remains a firm favourite.
“The proportion of office acquisitions by offshore capital sources has steadily increased post the financial crisis in 2007 and reached an all-time high of 52 percent in 2015 before easing back to AU$5.8 billion or 42 percent in 2016,” says Simon Storry, Head of International Investments for JLL in Australia.
But they’re not just buying – Storry believes that strong sell-side activity from foreign investors highlights the potential to generate higher returns in riskier markets.
“Due to geography, distance and size of the market, Australia came late to this cycle’s global investment party, despite much higher yields than in many other developed markets,” explains David Green-Morgan, JLL’s Global Capital Markets Research Director. “However, when Australian interest rates started to decline, the flow of capital increased and those first movers, in particular, have benefitted the most from significantly higher yields than exist today.”
Within the country’s major markets, Sydney and Melbourne are classed as high growth, while Brisbane and Perth are offering counter-cyclical opportunities and can be viewed as the ‘cheap side of fair value markets’.
“We are seeing contrarian investors also looking to secondary cities such as Perth and Brisbane for bottom of the cycle opportunities,” says Green-Morgan.
A global trend
With cross-border activity set to surpass 50 percent of the estimated US$1 trillion investment volumes by 2020, the trend is not just limited to Australia.
The number of offshore investors into the U.S. increased to 207 in 2016 from 134 in 2006 while, in Europe, 625 offshore investors were active in 2006, with that increasing to 859 in 2016.
“The globalization of the real estate investment market is still in its infancy with this cycle being the first time that we’ve seen it become firmly established,’ explains Green-Morgan. “It’s becoming evident that investors are increasingly just as happy looking for opportunities on the other side of the world as they are in countries closer to them.”
“Certainly post financial crisis we have seen a multitude of new institutional capital sources into direct real estate from China, Taiwan, Singapore, Malaysia, Norway, Africa and Latin America,” he says.
“It will be interesting to see how these investors react when the cycle starts to turn and rents and values begin to adjust; will they still have such a wide ranging viewpoint?”