Commercial property a safe haven in volatile share market
Another volatile week on world financial markets leaves us to wonder what it all means for Australian commercial real estate. It means many things, but most significanty, it further highlights the safe investment haven Australia has become for many asset classes, especially commercial property.
Foreign investors are increasing their prescence in the Australian commercial property sector, especially in the quality end of the market. In the first six months of 2011, foreign investors accounted for 28% of transactions above $20 million. This is twice the long term average. Although only half done, so far in the 3rd quarter, foreign investors represent a staggering 61% of all sales, by volume.
As global volatility grows, so too does foreign investment into the Australian property market. By far the largest source of funds is now Asia (20% of all purchases so far this year), as Pension Funds grow, Property Fund Managers become increasingly active and REIT’s also start to spread their wings. But North America (accounting for 10% of all purchases) is also opening up as a source of funds (despite the high AU$), with new entrants from the USA and Canada now increasingly active. Add to that the occasional foray by European-based funds and private investors, along with investors coming from South Africa and it seems the whole world is now chasing Australian real estate.
And why wouldn’t you? We may think we have our problems with floods, cyclones, a looming carbon tax, rising cost of living and an economy too reliant on the mining sector, but compared to the rest of the world, we’re in very good shape and have a very bright outlook.
Despite a patchy recovery, forecasts still point to an improvement in economic growth over the next twelve months and this will underpin the recovery in the commercial property markets as well. Add to this the famous transparency and ease of doing property business in Australia and the choice to look downunder is obvious.
But the most interesting part of this trend may be only just emerging. Prices are starting to rise on the back of all this foreign investment. Yields remain attractively high in Australia relative to other countries. The traditional theory of the high cost of local debt limiting any scope for yield compression is going out the window as foreigners use mostly equity. The increasing number of foreign players, coupled with the locals, is starting to put some much-needed tension back into the marketplace and this is resulting in prices being bid up for the most sought-after assets. This must ultimately flow through to local valuations.
Yes, it may have been a stressful week in the stockmarket. But by further re-inforcing foreign interest in the Australian commercial property markets, it may have also been an important turning point in restoring capital values.
Kevin Stanley is executive director of global research and consulting for the Asia Pacific region at CBRE.
