Foreign Investors To Pick Off Local Property Assets In 2022

ALEXANDRA CAIN | TUE 18 JAN 2022 | THE URBAN DEVELOPER

Offshore investors sunk $16.6 billion into local office, retail and hotel assets this year, rounding out a strong year of foreign investment in Australian commercial property.

The Singaporeans led the charge, making up 39 per cent of dollars exchanged, while North American investors accounted for 31 per cent of foreign activity in the local real estate market.

And the trend is likely to continue into 2022 as borders re-open and bullish offshore investors indicate an appetite for a high level of real estate allocation.

Major transactions involving foreign money included the $925-million sale of a 50 per cent stake in Grosvenor Place to Blackstone, the $3.8-billion sale of the Milestone industrial portfolio to a partnership between GIC and ESR Australia, the $538.2-million sale of a half stake in Sydney’s Queen Victoria Building, The Strand Arcade and The Galeries to a Link REIT and EG Funds partnership and the $315-million sale of the Sofitel Wentworth Sydney hotel to KKR, Futuro Capital and Marprop.

Office remained the most invested in asset class, with a rise in office asset values predicted for 2022.

Industrial and logistics followed close behind, with Australia highlighted as a key destination for capital deployment next year, according to Colliers’ capital markets report.

CBRE’s Pacific head of capital markets Mark Coster says international capital is expected to play a continuing role in commercial property investment next year.

“Australia is an attractive proposition given available returns and the relative strength of the economy compared to some parts of Asia, North America and Europe,” he says.

Coster expects overseas investors to be especially interested in retail assets in 2022.

“The amount of international capital assessing retail assets has increased significantly during 2021 and we’re also fielding considerable interest in alternative asset classes such as life sciences and data centres.”

Australian assets are especially attractive to European family offices from the risk-adjusted return as well geographical diversification perspective.

Martin Lechner, founder of Singapore’s Corecam Family Office, which has European clients, told a recent Private Debt Investor podcast that, as an international allocator of capital, he looks at the risk return opportunities of the different segments and sectors from a global perspective.

Lechner says European high-net-worth clients are attracted to Australia real estate assets due to Australian demographic trends, migration trends and to get exposure to the currency, “that made us allocate quite a substantial percentage of our global real estate lending to Australia.”

In general, overseas investors are keen on the local market’s unique specs.

“When we think about outsized returns, Australia is a stable market, with stable governments and proven and reliable rule of law,” MaxCap managing director Wayne Lasky says.

“It’s particularly creditor friendly and, prior to the most recent technical recession, we had 28 years of consecutive economic growth.”

RBA governor Philip Lowe’s assertion that the cash rate of 0.1 per cent will remain at that historic low for years to come is also attractive to overseas investors because it indicates a high degree of stability.

“This is relevant since most real estate lending in Australia is on a floating rate basis. That being said, you'll find loans that are fixed against wholesale bank bill rates that are highly correlated to the cash rate,” Lasky says.

Nick Browne, director of alternative assets management firm Jameson Capital, says offshore investors are very interested in Australian real estate due to the nation’s strong response to contain Covid, bipartisan political and economic support for the economy, strong rule of law and investor-friendly environment relative to other markets in the region.

“Overseas investors are an important part of the mix thanks to lack of funding alternatives in a market with limited capital market sophistication,” he said.

“Biases from domestic investors also tend to concentrate local capital in specific markets, creating excellent opportunities for offshore investors on a risk adjusted basis.”

Browne says that next year, investors will remain focused on the core commercial sectors of office industrial and retail, with a gradual re-weighting away from retail to industrial and logistics.

“These are the largest and most liquid sectors with the greatest amount of deal flow and therefore attract the most amount of capital,” he said.

“Some investors are also starting to realise there is substantial value in non-traditional sectors such as student accommodation and build-to-rent that have become very popular over the past decade.

“Some of these non-core sectors are extremely large asset classes in Europe and North America and offshore investors see the growth potential for these markets to expand over the coming decade in Australia.”

Browne also notes more specialised opportunities that generate high returns don’t tend to be popular with larger capital allocators that lack in-house expertise.

But they are a focus for regional fund managers, private banks, multi-managers and offshore family offices.

When it comes to asset values, offshore investors, like all investors, seek relative value to other investment opportunities they are considering.

“If they do not believe the Australian real estate market is priced competitively relative to other markets in the region, they won’t be deploying capital in Australia.”

Jameson also doesn’t expect foreign investment into Australia to create price distortions in the market.

“Changes in price that do not reflect underlying market fundamentals can be the result of investors allocating capital for reasons other than seeking purely financial returns.

“This was most recently seen through the middle of last decade where specific groups of offshore investors sought to move capital from their home market into Australia, which resulted in price growth beyond that which could be supported by domestic investors.

“The implementation of capital controls in some of those markets has dramatically reduced the velocity of these inflows to Australia.”

While nothing’s certain in a topsy turvy world, it will be interesting to see which assets pique offshore investor interest this year.

AUTHOR: Alexandra Cain?