After acquiring more than half of all Australian office towers sold last year, foreign investors are expected to continue to show a strong appetite for commercial property through 2016.
The latest data from global real estate group CBRE indicates that overseas investors accounted for 54 per cent of office turnover in Australia in 2015 – the highest level witnessed since the start of data collection.
According to Rick Butler, CBRE senior managing director of capital markets, the strong allure of Australian commercial property for overseas investors is set to continue this year, as the factors underlying its allure are likely to remain unchanged.
“There’s nothing changing – our cap rates and yields are higher than elsewhere, and we have a transparent environment where you can do a deal and sue someone for the rent,” said Butler. “I can’t see any change on the horizon.”
Butler points to comparatively strong yields in tandem with low interest rates as being the primary source of appeal of Australian commercial real estate to foreign purchasers.
“Over my career, which started in 1983, it used to be upside-down, with interest rates that were higher than yields, but we’re now suddenly in a situation where our yields are higher than our interest rates,” he said. “The facts are that are the moment you can buy something on a return of, say, six per cent and pay all in three per cent or three-and-a-half per cent interest, you actually have a positive cash flow on the portion you borrow on.”
Leading commercial property markets in other parts of the world are only providing tepid returns right now, further enhancing the allure of Australian real estate to investors from around the globe hunting for high returns.
“In Shanghai, the cap rates or yields are at two or three per cent, and Hong Kong and Singapore are the same. Germany also has very low cap rates, while in Switzerland you’re actually paying half a per cent to put your Swiss francs in the bank,” said Butler. “It’s negative returns.
“As a result, inbound investment from the EU – the Germans and Swiss – has been quite strong alongside the Asian countries. They’re buying because they can’t get returns for their pension contributors or open-end fund contributors back home, when they’re at five to seven per cent in Australia.
“An open-ended German union fund bought 155 Clarence St. in Sydney, while we did a couple of deals for Credit Suisse last year, and we’ll do more this year.”
Butler further expects investors from North America to increasingly set their sights on commercial property in Australia due to similar poor conditions in their own markets.
“North Americans are also escaping low cap rates in their own markets to buy down here,” he said. “The US is growing, and you also have the Canadians, with Montreal’s Ivanhoe Cambridge doing a major deal here last year.”
Liquidity is another major factor underlying the appeal of the Australian market, particularly compared to other major economies that enjoy similar levels of stability and transparency.
“If you look at the Australian market and compare it to Montreal or Toronto, New York or Tokyo, you’ll find that the big difference is the liquidity – it’s just unbelievable how many transactions we do a year compared to most countries,” Butler said. “So that’s a big part of why people come here.”
The only element that Butler sees as a potential impediment to rising foreign investment in Australian commercial real estate is interest rates changes and their impact on purchasers that hedge, a consideration that will nonetheless be of limited significance for many global investors.
“A potential downside is interest rates starting to move and the effect on countries out there that must hedge. If they’re borrowing, the borrowed portion is a natural hedge, but the equity portion they hedge, and it costs around two per cent.
“But that’s only for people who must hedge – a lot of global institutions are buying all over the world, so if a currency’s upside-down in one place they don’t need to sell until it recovers, and can still sell something elsewhere.”