Foreign investors paying inflated prices for commercial property: Fund manager

Foreign investors are paying inflated prices for commercial property in Australia as yields are still better than the low interest rates available offshore, a local fund manager says.

Australian Unity head of property, mortgages and capital markets Mark Pratt said foreign buyers were ignoring softness in Australia’s economy, weak business and consumer sentiment and high vacancy rates in commercial property to snap up buildings.

“We have an extraordinary level of cash looking to invest in Australia, domestically and offshore, driven by Australia being seen as a safe haven destination for capital but also, whilst we have historically low interest rates, they are, in a relative sense, higher than most jurisdictions,” Pratt said.

Commercial property in Australia is offering cap rates of 7% to 7.5%, which is considerably higher than the local cash rate of 2.5%, Pratt said. In Asia, where cash rates are even lower, the difference between the returns available and the risk-free rate is even greater, driving demand from offshore.

Some buyers were paying 20% more for buildings that Pratt judged their value to be.

“Private capital is coming in from overseas, it’s here as a holding purpose rather than any underlying fundamentals and that introduces some interesting dynamics into the buying market,” he said.

Pratt said the increased demand from overseas buyers made it difficult for fund managers that had a mandate to invest through varying property cycles to identify assets that offered good value. There were still opportunities in secondary office space and healthcare properties, he added.

It was also making owners who had not been planning to sell their assets consider the possibility.

“If we get a good offer we have to consider whether it’s worth selling even if it’s not in our plan,” Pratt said. “We have to balance [a sale] against the risk in the future. With demand coming in that’s happening more frequently.”

Pratt said AUI was always working to improve the income generated by the properties it owned in its funds but weak tenant demand was limiting the opportunities.