Foreigners take 38% of record commercial property sales: Tony Crabb

GUEST OBSERVER

Investors splashed out a record $29 billion to purchase commercial property (more than $2m) – office, industrial and retail - in the 12 months to December nationally, up 20 percent on the last two years with foreign investors taking a 38 percent share.

The total, comprising more than $17.2 billion worth of office transactions, $4.8 billion worth of industrial transactions and $7 billion worth of retail property transactions, is an extraordinary 32 percent up on the five year average of $22 billion following a similar rise on the $18 billion average in the previous year.

It was more likely than not that significant levels of investment would continue with foreign investment, particularly from China, and institutions, the key players.

What we have seen over the last three years has been an extraordinary investment market in terms of sales by number and value.

Local trusts and funds along with foreign investors have dominated the markets, however in 2015 domestic institutions, recovering from the GFC and replacing private investors as competitive buyers once again, have suddenly found themselves outbid.

While institutional investors were the second largest player with 35 per cent of purchasers, their share of the market had fallen from 48 percent (Funds 31 percent, Trusts 17 percent) in 2014 to 35 percent (Funds 21 percent, Trusts 14 percent) in 2015, while the foreign investor take at 38 percent was more than 70 percent up on its 22 percent share in 2014.

Weakness in the currency, high relative yields and economic growth (however below trend) had been the key drivers while the large amount of off-shore capital seeking  Australian property had encouraged many domestic investors to dispose of property, reweight portfolios and change exposures.

This led to a record year of approximately $29 billion of turnover in commercial property. Conversely, many market fundamentals demonstrated the two-tone nature of the Australian economy – some indicators deteriorated in Perth and Brisbane, many showed substantial improvement in Melbourne and Sydney. Brisbane appeared to have reached a base whilst Melbourne and Sydney continue to improve.

The capital markets had exhibited greater degrees of volatility throughout the year and had finished the year largely unchanged with the ASX200 returning around 1 per cent, the Australian dollar down over 10% against the US dollar and 10 year bonds yielding approximately 2.8 percent.

While property yields have firmed across the board returns remain significantly higher with unlisted property returning up to 10 percent and AREITS returning 13 percent over the last five years. There is no doubt this has also had an impact on investment decisions.

He said the firming of investment yields had yet to fully run its course.

In some markets fundamentals are improving rapidly. We believe this will lead to further tightening in yields as investment capital starts to price in expectations of future NOI (net operating income) growth. This part of the yield cycle is just beginning.

At a glance:

Office sales - $17.2 billion in sales; previous year $16.7 billion; five year average $12.4 billion. 221 properties sold, 326 in 2014.  Foreign investors purchased 45 percent of the stock ($7.6 billion).

Industrial sales - $4.8 billion in sales; previous year $5.55 billion; five year average $3.8 billion;  221 properties sold, 277 in previous year. Foreign investors purchased 36 percent:

Retail sales - $7 billion in sales ; previous year $7.2 billion; five year average $5,8 billion. 197 properties were sold, down from the previous year of 221. Foreign investors purchased 26 percent.

Tony Crabb is Savills Australia’s national head of research and can be contacted here.