High net worth investors and soveriegn wealth funds to put their stamp on Australian commercial property

High net worth investors and sovereign wealth funds - potentially armed with billions of dollars - are set to put their stamp on Australia's commercial property market in the year ahead. 

Those two forces are expected to drive a year of change for Australia's commercial property market, with emerging investors being one of the major changes due to a rise of high net worth (HNW) individuals and sovereign wealth funds (SWF) increasing their investment in the Australian market.

In the Asia-Pacific alone, ultra high net worth (UHNW) investors - those with wealth of more than US$30 million - are estimated to be worth US$6.59 billion.

The sovereign wealth fund market today is estimated to be worth US$6.1 trillion - nearly doubling in size since 2007. 

The findings were released in JLL's latest report The year of the push and pull market, which states that Australia's commercial property market will continue to be subject to "divergent forces", with some new factors and some continuing from 2013.   

JLL's Australasian head of research and co-author of the report, Dr David Rees, Australasian, said "the push factors that will lead to increased capital flow into real estate in 2014 include the growth of HNW individuals, the expansion of SWFs, growth of funds under management (FUM) by superannuation funds, increasing portfolio allocations by investors to real estate and away from equity markets, low interest rates, a premium paid for market transparency and an ageing population."

Globally, he notes, that those UHNW individuals who have made their money from real estate continue to hold around 60% of their wealth in real estate.

“In 2014, development opportunities offering capital growth and often smaller capital value high yield opportunities are likely to be attractive to this category of investors", he said. 

Some of the ‘push’ factors identified in the report that will lead to increased capital flow into real estate markets are:

• SWF funds expanding in number and size;
• global growth of HNW investors;
• continued growth of the nation's $1.7 trillion superannuation market, with property a key part
• of its exposure, and
• a portfolio allocation tilt toward real estate. 

"A 1% shift away from equity and bond markets implies a 19% rise in real estate exposure if we measure the commercial real estate investable universe", the report said. 

Dr Rees said that although many funds had lifted their exposure to real estate, "many are still considered to be underweight in this area, so the potential for growth is strong.”

Dr Rees said the ‘pull’ factors in 2014 that would lead to increasing demand for real estate assets in selected markets were all about "new benchmark metrics that will become more relevant as the year progresses".

“It is all about spreads and if they are the new ‘normal’ or is there more adjustment to come in 2014?"

JLL is forecasting yield spreads between CBD markets to compress. 

It also believes yields spreads between prime and secondary grade assets will compress without reverting to pre-2008 levels and that incentives will contract but are likely to remain higher than historically. 

It is also tipping investor return expectations to adjust to a lower growth economy and the normal office market vacancy rates to be higher.