All Articles
Stephen Philp

Australia real estate continues to attract investor interest

In the hunt for yield in a low-interest rate environment, real estate continues to garner increased attention from pension and sovereign investors globally, who are increasing their tactical and strategic allocations, according to investment intention surveys (such as the 2015 Preqin Alternatives Report).

In Australia, the performance of commercial real estate remains strong. Although there has been a slowdown in sales activity in early 2015, compared to the record levels of transactions seen in 2014, capitalisation rates have continued to firm in the face of lower realised and forecast rent growth. While Australian yields are falling, they retain a significant spread to 10-year bonds and compare favourably to many developed real estate markets around the globe.

In a world competing for foreign capital, the Australian real estate market is well placed. Attributes such as clear title, low political, legal and corruption risks, along with high transparency and liquidity, make our local market an attractive selection. A lower Australian dollar has also inflated the purchasing power of foreign capital. More recently, messaging through free-trade agreements with major trading and investment partners, who are forecast to be the engines of world economic growth, are seen as directional developments.

In this environment, current investment decisions are less about income-growth expectations and more about the weight of money seeking investible commercial real estate stock in a low bond yield environment.

These dynamics have seen global asset allocators favouring Australian real estate. In 2014, Australia attracted 57% of all Asia-Pacific transaction volumes (RCA). The number of foreign investors and scale of their investment as a proportion of transaction value has increased from 10% in 2005, to 37% in early 2015, with the largest net inflow investors being China, Canada, Singapore and the US, according to Jones Lang LaSalle.

While foreign investment inflows have significantly exceeded outflows of capital from Australia, the volume of foreign and domestic capital leaving the Australian market has also increased from almost zero in 2012, to over A$2bn in early 2015 (JLL).

The limited access to real estate assets in Australia has more to do with market size - estimated at $656bn by Pramerica - than market liquidity. Taking the Australian transaction volumes between 2012 and 2014 as a portion of the total investible market size, commercial real estate markets in Australia are the third-most liquid globally, behind the United Kingdom and Sweden, with the US fourth, according to JLL.

The Asia-Pacific region is forecast to have 24 of the world’s top 50 cities by GDP by 2030. If this is realised, Australia’s location and export composition of goods and services should translate into strong growth, and support the weight of money that is now seeking to invest. 

This article is intended solely for the use of professionals and is not for general public distribution. Any assumptions made or opinions expressed are as of the dates specified or if none at the document date and may change as subsequent conditions vary. In particular, the document has been prepared by reference to current tax and legal considerations that may alter in the future. The article may contain "forward-looking" information or estimates that are not purely historical in nature. Such information may include, among other things, illustrative projections and forecasts. There is no guarantee that any projections or forecasts made will come to pass. International investing involves risks, including risks related to foreign currency, limited liquidity particularly where the underlying asset comprises real estate, less government regulation in some jurisdictions, and the possibility of substantial volatility due to adverse political, economic or other developments. Past performance is no guarantee of future performance. The value of investments and the income from them may go down as well as up and are not guaranteed. Rates of exchange may cause the value of investments to go up or down. Any favourable tax treatment is subject to government legislation and as such may not be maintained. The valuation of property is generally a matter of valuer’s opinion rather than fact. The amount raised when a property is sold may be less than the valuation.  Nothing in this article is intended or should be construed as advice. The document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment. TH Real Estate is a name under which Henderson Real Estate Asset Management Limited provides investment products and services. Issued by Henderson Real Estate Asset Management Limited (reg. no. 2137726), (incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3BN) which is authorised and regulated by the Financial Conduct Authority to provide investment products and services. Telephone calls may be recorded and monitored. COMP201500196