The Chinese government's foreign-investment clampdown may have been blamed for cooling Australia's commercial property markets, but optimistic projections suggest that investors from other countries have stepped in to pick up some of the slack.
The office, retail, and industrial market dropped 16.8 per cent or $5.24b from 2015/16 to 2016/17 to be worth $25.94 billion. Foreign investors accounted for just under $10b or 38.5 per cent of 2016/17 figures.
Despite a drop in the share of foreign investment in the Office market from 59 per cent to 45 per cent, foreign investment in industrial properties increased to 35 per cent from 29 per cent the previous year.ii Last year, many Chinese investors also turned to the hotel sector, purchasing 13 Australian hotels worth a total of $1.12b - well ahead of the $439m in domestic capital put into the hotels sector.ii
Restrictions come into play
Chinese-government moves to bolster the yuan - which have seen it impose tight restrictions on the types and amounts of acceptable overseas investments - have driven a dramatic change in the global investment market.
A recent Morgan Stanley analysis suggested that Chinese investment in overseas residential property markets would drop by 84 percent this year, to $2.15 billion, and another 15 percent next year.
This withdrawal has significantly impacted geographies such as the UK, where Asian investors accounted for more than half of commercial investment and Chinese interests alone comprised 25 percent. Their absence has turned London's once-buoyant property market into a "stagnant" shell.
Yet the demise of London's market does not, forecasts suggest, seem set to be repeated in Australia. A recent Cushman & Wakefield analysis suggested that investors from Singapore, Hong Kong, the US and Germany were stepping in to fill the void left by the clampdown on Chinese capital.
Many are attracted by reports that regularly place Sydney and Melbourne amongst the world's most desirable investment destinations: British investment firm Standard Life, for one, recently predicted the two cities would top the Asia-Pacific commercial real estate leaderboard this year.
Global head of real estate research and strategy Anne Breen noted that "the forces propelling Australian real estate values are global in nature and, in addition to the diversification benefits, investors can benefit from investing in these global trends with conviction."
"Domestic and international investors regard Australia as relatively low risk and a highly transparent market," Colliers noted.ii Changes on the horizon
Ongoing global interest paints a rosy picture for Australian asset owners and developers, who are well placed to sign overseas capital to support all manner of investments in commercial real-estate developments that continue to enjoy low office vacancy rates and rising values, despite tighter yields.
There were some strong commercial sales highlights in August, with Melbourne's 23-storey 120 Spencer Street office tower selling for over $250m and a four-storey Sydney CBD building selling for $70.5m to a Chinese group; the latter property was previously purchased for $45m in 2014 by another Chinese group, which realised a strong three-year return in its resale this year.
Long-term changes could complicate the situation. DEXUS Property Group warned in its Australian Real Estate Quarterly Review Q1/2017 that with an anticipated easing in the NSW population and weakening employment the state could join Victoria in slowing by fiscal 2019, compared with Queensland and WA. The investment market could also be shaped by a presumed strengthening US economy and rising interest rates.
Nonetheless, investment reviews continue to pinpoint Sydney and Melbourne as strong global performers. AXA Investment Managers recently named Australia "the first port of call" for investors in the Asia-Pacific region, while DEXUS noted continuing surges in office rents and expected "continued positive leasing demand, but a slowing of capital gain".
The changing nature of international commercial real estate investment in Australia requires commercial agents change gear to stay ahead of the market and gain leads in the sector.
- Cooling Chinese investment is being replaced by investors from other key geographies that see Sydney and Melbourne as high-appeal investment destinations. Turn your attention - and marketing - to espousing the advantages of the local market and providing opportunities for customers from these markets.
- Clampdowns on residential property investment are driving many Chinese investors towards commercial real estate. Despite the increased formalised restrictions by the Chinese government on outbound investment, there may still be commercial real estate opportunities to attract Chinese buyers to Australia over other jurisdictions.i
- Changes in the global environment and Australia's market may see growth in the commercial investment market in the long term slow. It may soon be time to consider sales tactics designed to maintain or gain market share in a cooling market.
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- Birtles, B. 2017, China's curbs on overseas property deals could worsen Australian real estate drop-off, ABC News, http://www.abc.net.au/news/2017-08-21/china-curbs-on-overseas-property-deals/8828450, accessed 12 September 2017.
- Colliers International 2017, 2015 / 2016 Capital Markets Investment Review, http://www.colliers.com.au/find_research/speciality_reports_and_white_papers/2017_capital_markets_anz_investment_review/, accessed 12 September 2017.
- Wang, Y. 2017, China's Crackdown On Capital Flight Is Claiming Some Of Its First (And Biggest) Victims, Forbes, https://www.forbes.com/sites/ywang/2017/03/16/chinas-crackdown-on-capital-flight-is-claiming-some-of-its-first-and-biggest-victims/#74a633f13da6, accessed 12 September 2017.
- Edwards, J. 2017, China has suddenly stopped buying foreign property, Business Insider Australia, https://www.businessinsider.com.au/china-overseas-property-investment-uk-2017-8, accessed 12 September 2017.
- Colson, T. 2017, Here are the factors slowing down the UK's 'stagnant' housing market, Business Insider Australia, https://www.businessinsider.com.au/uk-housing-market-explained-price-2017-7?_ga=2.132364808.761762067.1504871314-858047225.1500690004&r=UK&IR=T, accessed 12 September 2017.
- Cummins, C. 2017, Singapore now the biggest foreign investor in Australian property, as Chinese investment drops 69pc, The Sydney Morning Herald, http://www.smh.com.au/business/property/singapore-now-the-biggest-foreign-investor-in-australian-property-as-chinese-investment-drops-69pc-20170825-gy4fqj.html, accessed 12 September 2017.
- Schlesinger, L. 2017, Sydney, Melbourne offices best in class: Standard Life, Financial Review, https://www.commercialrealestate.com.au/news/sydney-melbourne-offices-best-in-class-standard-life/, accessed 12 September 2017.
- Schlensinger, L, 14 May 2017, Sydney, Melbourne offices best in class: standard life, https://www.commercialrealestate.com.au/news/sydney-melbourne-offices-best-in-class-standard-life/ accessed 12 September 2017.
- Johanson, S. 2017, Spencer Street tower sells for $250m amid east coast office boom, The Sydney Morning Herald, http://www.smh.com.au/business/property/spencer-street-tower-sells-for-250m-amid-east-coast-office-boom-20170825-gy3zks.html, accessed 12 September 2017.
- Meredith, B. 2017, Hyde Park's $70.5 million dollar sale, CoreLogic, https://www.corelogic.com.au/news/hyde-parks-705-million-dollar-sale#.WbKBstMjEUE, accessed 12 September 2017.
- Australian Real Estate Quarterly Review 2017, Upside and Downside risks finely balanced Q1/2017, Dexus Property Group, www.dexus.com/-/media/files/articles/research/dexus-research_areqr_q117.pdf, accessed 12 September 2017.
- Real Assets Research Team 2016, Asia Pacific - Australia the first port of call, Investment Managers, https://realassets.axa-im.com/en/content/-/asset_publisher/x7LvZDsY05WX/content/asia-pacific-australia-the-first-port-of-call/23818, accessed 12 September 2017.