Global pension and sovereign wealth funds are increasingly shifting their Australian property investment focus towards smaller cities such as Perth. Photo: Bloomberg

Foreign investors branch out in Australia's commercial market

Smaller cities becoming more attractive for commercial property seekers after traditionally focusing their energies on Sydney and Melbourne

Foreign investors, who traditionally focus on Sydney and Melbourne office buildings, are turning to properties in other cities in Australia amid rising competition for assets, according to Invesco.

Global pension and sovereign wealth funds are increasingly investing in malls and warehouses in Brisbane and Perth, said Ian Schilling, head of Australian real estate at the asset manager. That follows a drop of about 50 basis points in capitalisation rates for premium office towers as competition from foreign and local investors climbs, he said.

"Over the last couple of years, the weight of capital focused on quality Australian opportunities has increased," Schilling said. "A lot of clients tend to focus on major office markets in gateway cities, but we see that being diversified as they become comfortable looking at other markets."

A building's capitalisation rate is a measure of its investment yield, which falls as prices rise.

The weight of capital focused on quality ... opportunities has increased
Ian Schilling

About A$8.6 billion (HK$61.82 billion) of office properties changed hands in the first half of this year, compared with A$13.1 billion for all of 2013, preliminary figures from JLL show. There were some A$11.5 billion of sales across all commercial properties, matching the pace of 2013 when a record A$23.8 billion were sold, according to the July report.

"There remain large investors looking to deploy large amounts of capital into core products," said Rob Sewell, the broker's head of office investments, in the report. Sales this year "will result in new pricing benchmarks."

Invesco's Australian property unit invested almost A$750 million in four deals last year, and now manages A$850 million, accounting for 15 per cent of Asia-Pacific holdings, Schilling said. The firm, which entered Australia in 2012, expects a similar volume of transactions this year, he said.

While competition has driven down capitalisation rates, they remain at "attractive spreads to the borrowing rate", Schilling said. "So the return on equity is still appealing."

After an investment in a Melbourne residential development by closely held Grocon, Invesco is seeking similar opportunities this year, Schilling said.

"There's a big boom in residential development at the moment," he said. "A number of developers want investment to help their funding gap and that's where we can step in."

Home prices across Australian state and territory capitals rose 10.2 per cent in July from a year earlier, according to the RP Data-Rismark Home Value Index.

Invesco has also invested about A$500 million in US and European properties on behalf of Australian pension funds over the past 18 months, Schilling said. That will continue to increase, he said, declining to quantify the growth.

"Australia represents about 2 per cent of the global commercial real estate investment market, but is the fourth-largest source of investment capital globally," he said, adding the country is set to move into third place as government-mandated employer contributions to pensions rise to 12 per cent of salaries by 2019 from 9.5 per cent.

Australian pension funds realise that "with that growth and the relatively small size of the Australian market, they will need to look offshore".

Invesco manages about US$53 billion of real estate globally.

This article appeared in the South China Morning Post print edition as: Brisbane and Perth the new markets for foreign buyers