Offshore investors forced into local capital partnerships by lack of stock, heightened competition: Cushman & Wakefield
A pronounced shortage of stock and heightened competition for property assets is forcing offshore investors into capital partnerships with local players to secure a foothold in the Australian property market.
The findings were revealed in new research from Cushman & Wakefield which showed that since the end of the GFC, the total value of transactions recorded in the Sydney, Melbourne and Brisbane office markets had topped $10 billion in the 12 months to June 2013.
But despite that significant spike, the report pointed out that there had only been a limited number of direct property purchases.
Cushman & Wakefield associate director of research and consultancy Peter Ainge attributed that shift to the increasing practice of capital partnerships.
“The proportion of capital partnerships to total sales has grown rapidly since the end of the GFC, with 46.4% of transaction volumes recorded in the Australian retail market and the eastern seaboard office markets in 2012 involving a capital partnership,” he said.
This year, the proportion of capital partnerships to total sales slipped back to just below 40%.
Cushman & Wakefield estimates the weight of money from offshore buyers aimed at Australian commercial assets to be US$16.5 billion (AU$18.5 billion) as at September. Combined with the shortage of prime available stock, Ainge said “it is clear that offshore investors need to get creative to penetrate the domestic market.”
Sydney was where capital partnerships had been the most prominent, the report said. One notable partnership was the $1.2 billion privatisation of the Charter Hall Office REIT, which saw the grouping of the Government of Singapore Investment Corporation (GIC), PSP Investments from Canada (PSPIB) and Charter Hall Group.
Stockland was another prominent name recognising this trend, it said, having made available a stake in its Piccadilly Centre in Sydney CBD, which should appeal to offshore money.
“As well as the shortage of prime stock making capital partnership a necessity for offshore investors intent on investing in Australia, the relatively higher barriers to investment when acquiring prime property investments is another important driver of this model,” said Mr Ainge.
The report cited a number of pros and cons in capital partnerships.
Among the advantages identified by Ainge were access to prime assets that would otherwise be unavailable, lower entrance costs, access to existing management expertise, reduced single building exposure and increased portfolio diversification. On the flipside, he said adopting a capital partnering relationship still required risk mitigation when it came to the potential for difficulties in exit strategy, pricing risk and the investor having limited control of the asset.
With investment appetite for core Australian investments continuing to grow, and alternative investment opportunities shrinking rapidly, “it is expected that the uptake of the capital partnership model will continue to grow in popularity,” it concluded.