Higher yields attract capital
Robert Harley
452 words
16 Sep 2014
The Australian Financial Review
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English
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Australia has attracted 5 per cent of the global investment in commercial real estate over the past decade.
The figure, from global real estate group CBRE, underlines the disproportionate investment, particularly from offshore, in a country which accounts for just 2 per cent of the world's economy. And it raises a key question. What would happen to local real estate pricing if global investment flows normalised in line with economic weighting?
Since 2005, foreign investors have raised their net balance sheet exposure to Australian office towers, shopping centres and industrial facilities by $18.8 billion according to the CBRE report, Capital Attraction, The Rise of Australia as an Investment Destination.
Its a net figure, that takes account of the inflows and, in the case of investors from Germany, the United States and the United Kingdom, significant outflows. Nor does it take account of investments in hotels or in development sites, or housing.
CBRE's head of research, Australia, Stephen McNabb, said the local market had attracted an above average share of capital primarily due to firm and stable economic conditions, which have supported a higher interest rate and yield environment in comparison to other global markets.
"Capital follows investment opportunity and Australia has stood out as a recipient of global funds due to strong growth in real asset accumulation while business investment in other markets stagnated," he said.
"The associated growth in Australia's relative income saw a re-rating of prime rents in a global context in line with the stronger Australian dollar.
"Over the past decade, prime office rents (in $US) in the Sydney CBD have doubled while many other established markets around the world have seen much less significant growth."
Increasingly the investment is coming from Asia. In the past 18 months, 12 per cent of all outbound Asian real estate capital headed for Australia.
CBRE senior director, international investments, Rick Butler, said the momentum would continue as new sources of capital emerged.
"An additional $US75 billion is expected to be invested into commercial real estate globally by Asian life insurers as a result of ongoing deregulation, with China and Taiwan leading the charge," Mr Butler said.
But what happens if global real estate flows normalise. One key global investors, Singapore's GIC, is now reweighting to developing economies like India.
Mr McNabb said CBRE was optimistic that the current trends would continue for the next 12 to 18 months. "We acknowledge that Australia's relative attractiveness will fade beyond that and that allocations are likely to normalise over time," he said. "An improvement in global economic growth and a return towards 'normal' interest rate settings will be the likely catalyst."
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'Disconnect' in office sector
Matthew Cranston
393 words
18 Sep 2014
The Australian Financial Review
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English
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The former head of Australian real estate at investment giant BlackRock, Paul Healy, has given a gentle warning to property fund managers about the growing disconnect in Australia's commercial real estate market.
"I do have mild concerns, but the unknown question is whether this is a structural shift in investment returns," Mr Healy said.
As the current chief executive of the Property Funds Association – the peak body for $79 billion in unlisted commercial property – Mr Healy's views are closely monitored by fund managers.
"The only disconnect in the market is in the office sector where incentives are stubbornly high," he said.
"At the same time you have very large investment in the sector at very low yields.
"However, what tends to happen is that the incentives are wound back sharply and the structured leases in place include increases in rent.
"I think a lot of the offshore money is taking a long-term view."
Mr Healy emphasised that he did not think there was any comparative disconnect in retail assets.
A year into his role at PFA, Mr Healy said he was keenly looking to improve the professional standards of the industry, which suffered some reputation setbacks during the financial crisis.
He said he had now met with executives from the Australian Securities and Investments Commission, such as commissioner Greg Tanzer, on a number of aspects including disclosure, distribution policies, acquisition costs, net tangible assets and debt-related issues. "The discussions have been harmonious," Mr Healy said.
Mr Healy made the comments on the sidelines of the PFA's Property Funds Roadshow event in Brisbane on Wednesday, where groups such as LaSalle Investment Management indicated a further push for commercial assets in Australia.
Other fund managers present, including Sentinel Property Group founder Warren Ebert, aired their concerns about the residential property funds and the commissions being paid for selling product in a heated housing market.
"People offering residential investments should declare what the real returns are," Mr Ebert said.
He said the returns being flouted in residential investments were only given in gross terms, when they should be given in net terms.
"They are only given gross returns because there are such big commissions being paid," he said.
"I think it's a con – it's a disgrace and it needs to be changed."
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Sydney conversions vital
Larry Schlesinger
468 words
23 Sep 2014
The Australian Financial Review
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English
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Office-to-residential conversions will safeguard the Sydney CBD office market from a vacancy blow-out in the medium term, commercial agents DTZ in a new report say.
About 700,000 square metres of new office stock will be added to the CBD market between now and 2018.
But at the same time 275,000 square metres of lower grade Sydney office space is expected to be permanently withdrawn for conversion to apartments. Taking into account other changes to the office mix, the net position will be 303,000 square metres of new office space added to the market over this time frame and putting a floor under any correction in face rents.
"Without these office withdrawals the vacancy rate would peak at 11.3 per cent rather than at 9.85 per cent in 2016-17 under our baseline scenario," Dominic Brown, head of research at DTZ, said.
Dr Brown said the consensus view was Sydney's CBD was in the early stages of a slow and steady recovery in tenant demand, but that this recovery was "robust".
Permanent office withdrawals are likely to include 19,500 square metres at 201 Elizabeth Street tower, where Asian developers are jostling for the $350 million offering.
Another is Goldfields House at 1 Alfred Street with 24,000 square metres of office space, which Shanghai-based developer AXF Group is circling, and 231 Elizabeth Street, with 23,000 square metres of office space sold by Investa to Singapore's Bright Ruby for $201 million in March last year.
Permanent office withdrawals and increased demand for space from a wider range of tenants beyond IT and telecommunications will ensure net face rents remain broadly unchanged as the market absorbs more new stock.
As the supply cycle draws to an end in 2017-18, stronger tenant demand is forecast to result in more pronounced net face rental growth of up to 4 per cent a year under DTZ's baseline scenario and between 2 per cent and 5 per cent across all scenarios.
DTZ's baseline, most likely - scenario encompasses an "unspectacular, recovery" in the national economy. A worse case scenario, rated as having an only a 10 per cent change of occurring would be a mortgage-lending induced financial crisis in China.
Nearly half of new A-grade office supply will come from the completion of the three commercial towers at Barangaroo South, which offer a combined 300,000 square metres of office space.
The first tower is due for completion next year.
Even under a worse-case scenario, net absorption would be positive, Dr Brown said. He said incentive levels had likely peaked in Sydney at about 30 per cent and would come down between now and 2018, meaning "slightly higher effective rental growth".
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Reserve Bank warns of a ‘sharp repricing’
THE AUSTRALIAN SEPTEMBER 25, 2014 12:00AM
Kylar Loussikian
Journalist
Sydney
Transcations in commercial property.
Transcations in commercial property. Source: TheAustralian
AUSTRALIA’s commercial property market is increasingly vulnerable to a price correction, the Reserve Bank warns in its Financial Stability Review released yesterday, singling out strong investor appetite unmatched by tenant demand as risks to the sector.
The review considered the overall stability of Australia’s financial system, on which the commercial property sector had a disproportionate impact, accounting for almost 30 per cent of banks’ domestic business lending.
But there was limited risk to Australian lenders, with lower precommitments in new developments funded from developers’ own equity or, in the case of overseas developers, foreign banks.
Most significantly, the RBA warned that although “the flow of foreign capital into the sector increased strongly over the past year”, once global interest rates began to rise, or if there was a reversal in the strong growth of investor demand, the market might be exposed to “a sharp repricing”.
However, Darren Steinberg, chief executive of Dexus Property Group, said there was not a structural issue, pointing out that yields in Australia were higher than most major economies.
“Underlying leasing demand is improving in Sydney and Melbourne, and what we’re seeing isn’t an Australian phenomenon,” Mr Steinberg said. “As a result of volatility in equity markets, people are chasing real assets and stable returns, whether it’s in property or infrastructure.”
John Dynon, head of real estate specialist funds at AMP Capital, agreed, adding that “a high degree of transparency and market disclosure” would mean Australia remained a preferred destination for investors.
Heavyweight foreign groups are still raising hundreds of millions of dollars of fresh equity for regional property funds that are hunting for Australian real estate.
Notably, private equity group Blackstone has emerged as a major buyer of property locally, with TIAA Henderson also buying assets.
An earlier RBA paper found that overseas investors had purchased almost $5 billion worth of commercial property in the first half of the year, accounting for nearly 40 per cent of the value of all sales, up from an average of about 25 per cent.
Much of the concern centres on weak leasing conditions and subdued tenant demand in CBD office and industrial properties, particularly in Brisbane and Perth, where a substantial number of assets are under construction or are being refurbished.
While the supply of office properties in Sydney is also expected to increase, the effect of weaker tenant demand has been somewhat defrayed by the withdrawal of older assets as they are converted into apartments.
Sun shines on Sydney towers
Nick Lenaghan
510 words
25 Sep 2014
The Australian Financial Review
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English
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Sydney's supply-constrained CBD is forecast to be the hottest office market in Australia by the middle of next year.
The vacancy rate will slip to 8.5 per cent, the lowest of the mainland markets by July 2015, pipping Melbourne at 8.6 per cent.
Sydney emerges as the clear winner among analysts, in consensus forecasts compiled in a Property Council of Australia report for the office markets.
"As the balance of economic growth shifts from mining to non-mining, the Sydney CBD office market should be first out of the blocks with low supply and growing demand leading to falling vacancies, and eventually incentives," Tony Crabb, Savills research head said.
Nevertheless, incentives remain high in Sydney – forecast to be at 29 per cent in July 2015 – and in the other big markets as landlords contend with soft leasing markets.
Only Darwin and Hobart will have incentive levels in the single digits next year.
Over the next 12 months, demand for space in Sydney will hit 45,700 square metres, according to Collier's research chief Nerida Conisbee.
The combination of stock withdrawals and the improving employment growth augur well for the Sydney CBD, she said.Sustained run for Sydney
"If the early signs of finance and insurance employment growth continue, then Sydney will be in for a sustained run of rental growth."
The emerging hotspot of Parramatta also found favour with some analysts.
By July next year, vacancy in Parramatta will hit 6.2 per cent, the second-lowest in the national markets, behind east Melbourne on 2.2 per cent, according to the PCA report.
"Parramatta yields are at a cyclical peak and effective rental growth will be the stand-out nationally," Matt Whitby of Knight Frank said.
"Additionally, yield compression is cascading to non-CBD markets following significant yield-firming in CBD and select fringe markets over the past year."
Education has been a big driver in the Parramatta market, with about 35,000 square metres of space taken up by educational institutions.
This year, these include Singapore's Raffles Education Corporation and the University of Western Sydney.
Leighton Properties secured the University of Western Sydney to anchor its $200 million-plus office development in Parramatta
There were other dissenting analysts in the report, with one, at least, tipping Melbourne as a flourishing market in the next year.Melbourne demand to grow
"Like Sydney, Melbourne is set to benefit from an improvement in demand over the coming 12 months," Peter Ainge of Cushman & Wakefield said.
"A lower supply pipeline however, coupled with less vacancy in premium and A-grade buildings will help Melbourne to the top position," Mr Ainge said.
Looking more broadly, ANZ property analyst David Cannington forecast an improved outlook for the national office market despite softer conditions in higher vacancy rates and incentives.
"Looking ahead, improved outlooks for Australian non-mining business investment and a strong appetite among global investors for Australian commercial office property will buoy commercial office capital values," he said.
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Office market demand drops but tipped to recover
THE AUSTRALIAN SEPTEMBER 30, 2014 12:00AM
Greg Brown
Property Reporter
Sydney
IN a sign of tough conditions in the office market, underlying tenant demand for space nationally has dropped in the three months to the end of August to less than one-fifth of the quarterly average recorded over the last decade, according to BIS Shrapnel.
The firm’s senior project manager, Maria Lee, said that while underlying tenant demand dropped from an already low 225,000sq m in the May period to 125,000sq m in the August quarter, there would be an improvement in the back end of the year.
The growing property and business services industries would drive a recovery, she added. “We should see net absorption move back into positive territory by the end of 2014,” Ms Lee said. “We expect underlying demand to pick up in the November 2014 quarter as the weak November 2013 data drops out of the calculation.”
Colliers International director of office leasing Jock Gilchrist said inquiry from financial services companies was slow but the slack was being taken up by IT and media tenants.
“The largest number of national inquiry for August were from the IT and business services sectors, such as consulting and marketing,” Mr Gilchrist said.
Tenant representative Geoffrey Learmonth from LPC Australia said that while many companies were taking less space, there were a number of large space requirements in the market. “I think demand has been reasonably consistent over the last six months,” Mr Learmonth said.
Commonwealth Bank is in the market for 100,00sq m of suburban space, while Westpac (40,000sq m), IAG (35,000sq m), Navitas (18,000sq m) and UBS (18,000sq m) are among the large Sydney CBD office requirements. Marsh Mercer is also edging closer to signing a deal to move its offices to Tower 1 at Lend Lease’s Barangaroo South precinct.
Industrial sector heads for fall
Larry Schlesinger
366 words
25 Sep 2014
The Australian Financial Review
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English
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Incentives and vacancies will blow out, and rents and prices will fall in Melbourne and Brisbane's industrial markets, because of over-building and weak levels of demand, forecaster BIS Shrapnel says.
The stark warning was issued by BIS analysts Christian Schilling and Lee Walker after compiling new reports looking at the prospects for both industrial markets over the next decade.
Mr Schilling predicted these markets would start running into trouble in about three years' time. The catalyst, he said, would be rising US bond rates spurring fund managers to reduce their allocations to real estate.
"We don't think it's worth pushing yields lower to secure properties," he said.
"On anything but a 10-year-plus holding period and 10-year lease, passive investment in prime industrial property in Melbourne and Brisbane will fail to meet investors' current hurdle rates."
Mr Schilling said it was not hard to see why money was being poured into the sector: "New super-prime space offers high initial yields compared with office and retail property, longer leases, fixed annual rent increases and is easy to manage."Tenant demand weak
But he said the problem was that tenant demand was weak and investors were "pinching" tenants – sometimes from their own portfolios – by offering them once-in-a-generation opportunities to upgrade at virtually no additional cost with incentives as high as 40 per cent.
BIS calculated that in real terms (adjusting for inflation) tenants were paying a third of what they paid 25 years ago.
That is, net effective rent was $181 in 1989 compared with $60 a square metre today.
"There is solid demand from upgraders and companies engaged in the logistics/supply chain industry. But apart from the latter, tenants are seeking efficiencies from new buildings rather than additional space."
"The economy is struggling to make the transition from mining to non-mining investment, while the stubbornly high Australian dollar is continuing to cause hardship among trade-exposed industries – particularly the manufacturing sector," Mr Schilling said.
"The predominant business rationale is to cut costs in order to boost profit.
"Few industrial space users are expanding their requirements," he said.
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Weak office leasing forecast to improve
Larry Schlesinger
452 words
30 Sep 2014
The Australian Financial Review
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English
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Demand for office space stayed weak in the August quarter, but should improve heading into 2015, says forecaster BIS Shrapnel.
In August, annualised underlying demand for office space – a leading indicator of future net absorption and based on employment data – fell to just 125,000 square metres nationally.
It was down from a downwardly revised 250,000 square metres over the previous May quarter and well below the 10-year average of 660,000 square metres.
"We expect underlying demand to pick up in the November 2014 quarter as the weak November 2013 data drops out of the calculation," said BIS Shrapnel's Maria Lee.
BIS Shrapnel calculates underlying demand for central business district and metropolitan office space using four quarters of ABS labour force data. In theory, rising employment means companies need more office space.
Historically, a rise in underlying demand is usually followed, six to 12 months later, by an increase in net absorption and a lowering of the office vacancy rate, currently at 10.1 per cent, according to the Property Council.
Conditions will improve towards the end of the year, but Ms Lee said there would not be a major improvement in the office leasing market until the second half of the decade.
Across individual industry sectors, BIS Shrapnel said property and business services employment had rebounded from a dismal performance. But it said a much-anticipated decline in public administration and safety employment appeared to be coming through – consistent with the policies of cost-cutting announced by federal and state governments.
BIS Shrapnel found the other key office-occupying sector, financial and insurance services, showed fairly stable employment just below peak levels.
Figures compiled by BIS Shrapnel and others show the Sydney, Melbourne and Brisbane CBD markets were all supported by a proportion of lower-grade office stock being permanently withdrawn for conversion to high-rise apartments or hotels. Without those conversations, vacancy rates would be even higher.
The Property Council forecast vacancy rates of 16 per cent or more in Brisbane, Darwin and Perth by June 2016, compared with under 9 per cent in Sydney, Melbourne and Hobart.
Sydney was forecast as the strongest office market this year with prime rental growth of 2.2 per cent. Perth, where prime rents will fall 0.6 per cent , was forecast as the weakest.
In its latest Financial Stability Review, the Reserve Bank highlighted the underlying weaknesses in the office market, warning of the disparity between the prices being paid for office property by domestic and foreign investors and rents. "Any significant reversal of this demand could expose the market to a sharp repricing," RBA governor Glenn Stevens warned.
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Office and industrial sectors lead way in transactions
Mercedes Ruehl
385 words
2 Oct 2014
The Australian Financial Review
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English
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Commercial property sales are closing in on the record number achieved in 2013, with preliminary figures from real estate groups CBRE and JLL showing volumes have been led by the office and industrial sectors.
Sales jumped compared with last year. CBRE recorded $5.42 billion in sales for the September quarter, a 10 per cent increase on the same period in 2013. JLL preliminary figures show $5.89 billion worth of office, industrial and retail assets change hands, compared with $4.9 billion in 2013. The office sector led the charge. Sales driven by office buildings were up 62 per cent year on year for CBRE.
"The trend for domestic and international capital chasing core office opportunities continues, with many groups lowering their expected total returns," CBRE's head of capital markets and institutional investments Josh Cullen said.
Among the biggest transactions during the quarter were 52 Martin Place in Sydney for $555 million, a half share in Westpac Place in Sydney for $435 million and the CBW Buildings in Melbourne for $608 million.
"For the office sector alone, national volumes for the first nine months reached $12.79 billion, compared with $13.26 billion of sales for the full year in 2013," JLL's Australian head of office investments, Rob Sewell said.
"Other significant third quarter investment sales included the largest transaction in the South Sydney market in 2014 with the sale of DEXUS Business Park, Rosebery to Meriton for $190 million in a deal negotiated by JLL."
On the industrial side, sales were up 8 per cent for the quarter and 33 per cent for the first nine months of the year. Matt Haddon, CBRE's regional director for industrial and logistics said buyer demand has been more than deep enough to absorb increased transaction volumes. "This trend will accelerate into the fourth quarter. This will be the quarter that offshore investors regain a meaningful market share of Australian Industrial sales," Mr Haddon said.
JLL's preliminary figures for the first nine months of the year are $18.5 billion, compared to the record $24.1 billion for all of 2013. CBRE's commercial sales for the nine months to September total $15.9 billion, compared with $16.7 billion in 2013.
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Commercial prices to reconnect
Mercedes Ruehl
268 words
7 Oct 2014
The Australian Financial Review
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English
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The disconnect between commercial property prices and rents is unlikely to continue beyond next year, according to investment bank UBS.
The brokers told clients in a note that forecast higher interest rates globally will make Australia less attractive for investors searching for yield. "Amid a prolonged period of very low global interest rates intensifying the search for yield, foreign purchases of Australian commercial property doubled in the 2014 financial year towards $10 billion, which is a record 40 per cent share of gross flow and more than 100 per cent of net purchases – concentrated in established CBD offices," analysts Scott Haslem and George Tharenou said.
This is despite extremely high office vacancy rates Australia wide, with Perth and Brisbane suffering the most from low office demand.
"But this disconnect between prices and rents – especially for office is unlikely to continue beyond the next year.
"Firstly, we expect higher rates ahead will act to diminish the relative yield story."
A lower Australian dollar will also help with demand for office space next year. Having a local dollar will improve jobs growth – which correlates with CBD office net absorption – or demand – the analysts said.
"The supply pipeline is also responding, with new commercial property, especially office approvals, slumping in half this year to their GFC low."
However, conditions will remain subdued given supply exceeds demand, particularly in Sydney, where big office developments such as Barangaroo South come on stream in the 2015 financial year.
Office A-REITs, which includes DEXUS Property Group and Investa Office Fund, is UBS equity analysts least preferred sector.
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