Higher commercial yields to encourage offshore investment in Australia in second half of year despite withholding tax fears: CBRE

Australia dropped from third to fourth most popular commercial property investment destination in the second quarter of 2012, according to the latest Asia Pacific Capital Markets report from CBRE.

Investors snapped up close to $2.5 billion in Australian commercial assets, slightly higher than the first quarter of the year, but offshore investor sentiment dampened due to concerns over the doubling of the withholding tax from 7.5% to 15%.

The tax rate – charged on returns paid to overseas investors of managed investment trusts, many of which hold commercial property assets – increased from 7.5% to 15% on July 1.

Trusts that exclusively hold property built after July 1, 2012 and that meet high energy rating standards (five-star green star or 5.5 star NABERS) are taxed at 10%.

According to CBRE, China was the top investment destination in the Asia-Pacific region in the second quarter of 2012, attracting $4.5 billion of the $17.9 billion in commercial property assets snapped up by investors (both local and offshore) over the quarter – a 54% increase on the first quarter for the Asia-Pacific region.

According to the report, authored by CBRE’s head of Asia-Pacific research director Nick Axford, investor sentiment towards Australian commercial property deteriorated in the June quarter as offshore investors were forced to take into account the higher tax rate in their pricing to achieve the same returns.

But he expects the market to be more active in the second half of the year “given the volume of foreign money on the sidelines”.

Axford says most foreign groups are still attracted to the Australian markets given the high yields that are still available.

The report shows that Australia’s prime office markets have higher office yields relative to other parts of Asia-Pacific.

Sydney’s prime office yield is 6.43%, with Melbourne offering a return of 6.85%, Brisbane 7.56% and Perth 7.88%. This compares with smaller returns in Beijing (4.75%), Shanghai (4.25%), Tokyo (3.5%), Singapore (3.92%) and Hong Kong (2.5%).

Sydney, Melbourne, Perth and Brisbane are all offering retail yields in excess of 8%, compared to 4.6% in Hong Kong, 7.2% in Shanghai, 5.5% in Tokyo and 4.8% in Singapore.

For the year to June, Australia has been the third most popular commercial property investment destination, behind Japan and China, but ahead of Hong Kong and Singapore.

Australia has also been the most popular destination for investor outside of the Asia-Pacific region with the chart below showing that local investors were the biggest buyers of commercial property in all major investment markets.

CBRE’s figures taken into account office, retail, industrial and mixed-use property priced at US$10 billion and above.

CBRE says the 54% regional increase was underpinned by a rebound in cross-border investment activity as well as due to a rise in transactions worth US$250 million and above, most of which had been under prolonged negotiation.

“Sentiment in Asia-Pacific was mixed in the second quarter, with many investors mindful of the eurozone debt crisis, however private investors remained in buying mode and there was a significant increase in cross border investment activity,” says Axford.

“Western property funds were particularly active and Asia Pacific investors continued to be net buyers in the cross-border arena.”

The CBRE data shows that investment activity picked up in most markets, with the largest increases recorded in China, Taiwan, Singapore and New Zealand.

“Barring any dramatic negative developments in the United States and eurozone, we expect real estate investment activity to remain steady in the second half of 2012,” Axford says.

“Domestic investors will continue to dominate in their home markets although overseas core investors are likely to step up their activity, with Australia and Japan being the major focus.

“That being said, the availability of prime assets will remain tight across the region and investors are expected to take longer to reach decisions given the sizable gap in price expectations between buyers and sellers.”

The CBRE report highlights that office property remained the subject of strong interest in the second quarter, particularly in Australia and Japan, and comprised 47% of total investment turnover.

“The past 12 months has seen a rise in investment demand for retail assets in China and Hong Kong, whilst the high yields currently available in the industrial sector continue to attract investors.”