The strong Australian dollar has prompted speculation foreign investors will exit the Australian market and shy away from offshore investment, instead looking inwards to capitalise on local growth in their own countries.
But is this really the case? At a time when the Australian dollar is hovering at parity with the US dollar we are still seeing a strong influence from offshore investors in our property market. Asian, European and American buyers are snapping up assets across Australia, capitalising on attractive entry prices and acquiring A Grade buildings that will see good returns in the long run.
Transactional activity dips – foreign investment increases
Even though transactional activity in Australia dipped to $2.5 billion in the third quarter of 2011, a 27 percent decline since the second quarter, foreign investment into Australia increased to 41 percent, creating a 12-month period of consecutive increases in foreign investment.
The Sydney CBD saw the greatest level of investment, with four of the five largest deals transacting in the last quarter to offshore investors. The overall state of NSW was also popular with rural land lots being snapped up by Asian investors.
Victoria has always been a solid performer in Australia and one of the preferred destinations for off-shore investors, but we have seen NSW eclipse it in the third quarter of 2011. It is only the second time in 12 months that NSW has transacted over $1 billion in investment property sales. Diminishing stock and rising prices are the main reasons that Victoria, and particularly Melbourne, have been overlooked as investors look to other locations for greater value.
Australia-wide portfolio purchases continued to attract investors’ attention in the third quarter, helping boost interest and building on the strong run of 2010 and the first half of 2011. Over $6 billion has been transacted since the second quarter of 2010 in Australia-wide portfolio deals, second only behind NSW and slightly ahead of Victoria in geographical terms.
Asian investors here to stay – Americans enter the market
There has been a lot of hype in 2011 around Asian investors, but it’s not just hype. It’s a growing trend that is seeing Asian investors enter the market with more rigour than ever.
A whopping 90 percent of all foreign investment in Australia in Q3 came from Asia, with the remainder from the USA. K-REIT, HNA Group, Memcorp and Pembroke Real Estate all purchased Sydney CBD office assets during the last quarter.
We are seeing Americans showing renewed interest in the Australian market after several years of below average overseas investment.
Global financial volatility is once again shaping the market as most deals are occurring below the $100 million mark, with private investors becoming more active once again. Private investors were the biggest purchasers of property, with over $500 million committed in the last quarter.
While the four major banks remain keen to provide debt for commercial property, continuing uncertainty regarding global markets will be a cause for lending concern nonetheless.
Conversely, listed vehicles sold out of $700 million worth of property during the quarter, bringing their divestment in 2011 to over $3 billion. Pressure has been increased once again on gearing levels over recent months, with asset sales seen as a key requirement to lower debt levels and fund share buybacks, as noted in the recent REIT reporting season.
Private and unlisted vehicles also reduced their exposure during the quarter, although they remain net buyers of property in 2011. Institutions maintained their moderate net purchasing activity in Q3, as they have for the past five quarters, while corporate activity remains volatile, swinging between investment and disinvestment.
Office markets – A Grade
Once again, office was the most liquid sector, comprising over 60 percent of all transactional activity. Retail and industrial deals slumped this quarter, while hotel deals dominated the remainder of the market. Sydney CBD office was in particular demand with investors.
Quarterly transactional activity has now dipped below the three year rolling average of $3.2 billion, the lowest since the third quarter of 2009 when the market was recovering from the first GFC. Landmark deals of over $500 million also dipped and these deals have largely sustained the market over the past 12-18 months.
What can we expect in 2012
With three quarters of 2011 gone, it is unlikely that the market will match the $16 billion of transactional activity recorded in 2010. As at Q3, 2011 $11.2 billion has been transacted, so a $5+ billion fourth quarter would be needed to beat the 2010 level.
Certainly the wider market has run into significant headwinds recently, with renewed concerns over global financial markets. While the property fundamentals in Australia remain steady and the level of overseas activity is buoyant, concerns over the two speed economy and the rising unemployment rate are likely to delay investors’ decision making.