Larry Schlesinger | 29 August 2011

Offshore funds investing heavily in Australian commercial property

Investors poured more than $2 billion into Australian commercial real estate over the June quarter, accounting for a quarter (24%) of all Asia-Pacific transactions, according to research by CBRE.

About 30% of Australian commercial property was bought by offshore funds over the three-month period – double the long-term average.

The Canada Pension Plan Investment Board’s purchase of half of the 92,000-square- metre Northland shopping Centre in Melbourne at the end of May for $455 million accounted for almost a quarter of the total investment in Australian commercial assets and was also the biggest Pacific commercial transaction of the year.

Offshore funds continue to flow into Australian commercial property in the third quarter of the year, with Boston-based international real estate advisor Pembroke Real Estate, on behalf of an affiliate, buying 20 Martin Place, Sydney from ANZ for about $95 million.

Investment in the pacific region (including New Zealand) surged by 228%, albeit coming off a low base following a slow start to the year, while activity in Asia fell by 52%.

Overall, the Asia Pacific region registered just $9 billion worth of commercial transactions, a quarter-on-quarter drop of 52% as investors turned more cautious following the earthquake and tsunami in Japan and the economic picture worsened in the United States and Eurozone.

The drop would have been significantly greater were it not for Singapore-based Mapletree Investments spending $2.25 billion to acquire Festival Walk shopping mall in Hong Kong at the end of July, the largest commercial deal in the city's history.

Over the period Australia overtook Japan as the most heavily traded office market, accounting for 25% of all transactions by value. In total more than 50 office transactions took place over the period, with an average value of $80 million.

According to CBRE regional director for institutional investment properties Rob Sewell, the Sydney office market had been the subject of particularly keen investor interest.

“Buyers are keen to enter this sector now in order to capitalise on rising occupier demand for premium office space and the anticipated rental growth predicted to take place over the next few years,” Sewell says.

“Looking ahead, we expect foreign investors will be looking to further increase their presence in the Pacific region, especially at the quality end of the market, with investors turning to Australia and New Zealand as safe havens amid rising global volatility. Capital is currently seeking out high quality assets in prime locations with superior tenants and a lease length which offers security of income.” 

“Core Australian property assets are providing some outstanding defensive characteristics with the promise of very good upside income and growth. With Australian 10 year bonds currently yielding around 4.5% there is a much wider spread for core investors with returns of nearly 5% above the risk free rate. This represents quiet a compelling investment case.”

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