Strong domestic fundamentals, foreign demand lift Aussie commercial property to new highs
Foreign investment levels in Australia’s commercial property market are running ahead of last year’s levels. Last year was already a record high – 25 per cent of all office, retail and industrial transactions, over A$ 5 billion, were sales to foreign investors. For the first three quarters of this year, the proportion of offshore investor sales was 34 per cent. We anticipate the level of foreign investment will continue into next year, given the wide yield spreads between Australia and other markets and the strong domestic fundamentals – low supply and low vacancy in most commercial real estate markets.
Australia followed global trends in the third quarter of 2012. Investment demand has remained strong, while the leasing environment was generally subdued. Thus, while rental growth has been modest, the underlying demand for prime grade assets has seen yields remain firm. Real estate markets derive their strength from two fundamental sources – supply and yields. The limited supply pipeline is currently supporting values. There is very little office construction over the next two years and a similar story in industrial. For retail, the focus of many centre owners is on upgrading and refurbishing existing centres.
Year to date, we have seen A$ 12 billion of Australian commercial real estate transactions compared with A$ 8.2 billion in the same period in 2011 (office, industrial, retail). The high transaction volumes reflect, in part, the weight of money seeking exposure to prime grade real estate assets in Australia.
The risk for Australia is on the international economic outlook. But in the event of any reversal, the domestic market remains well supported by the balanced supply/demand in most markets and the strong demand from domestic institutional investors, many of whom have now recapitalised and are actively deploying their capital into the market.