Foreign capital wants to call Australia home
Australia has recorded the strongest year of office investment in more than a decade, says Savills director Ben Azar.
In the 12 months to September 2015, Savills recorded national office sales activity of $17.8 billion, with foreign investors outlaying $8 billion or 45 per cent of total sales.
“The commercial real estate market is now global; foreign investment is flowing into Australia not only from South East Asian investors and developers but also from mainland Chinese state-owned enterprises, insurance and sovereign wealth funds,” Azar, Savills director of cross border investments, explains.
He says there is an unprecedented amount of capital looking at property as an alternative to bonds, fixed income investments and equities.
Savills has recorded average market yields of 6.45 per cent for CBD Premium Grade office buildings for the year to September 2015. CBD A Grade and B Grade office buildings recorded 7.3 per cent and 8.69 per cent yields, respectively.
“Core, long-leased, modern office buildings are secure bond-like investments,” Azar says.
“Australian prime office yields are some of the highest yields in the world, so it’s not surprising that foreign capital is coming to Australian shores.”
Sydney continues to lead with more than $7 billion in sales recorded in the 12 months to September 2015, accounting for more than 40 per cent of national sales.
Foreign investors outlaid $4.1 billion in Sydney alone, accounting for 60 per cent of sales – with $2-3 billion of transactions still expected to be finalised before the year’s end.
“The Sydney market is setting new records, and we have to look back to 2006-2007 to see volumes and yields anywhere near current levels,” explains Azar.
“The current market is structurally very different to what it was then, offering a landscape with huge growth potential due to low debt levels, low cost of debt, further yield compression and rental growth.
“Despite a lot of new supply coming to the market, most notably Barangaroo, leasing market fundamentals are improving. Supply is somewhat constrained due to high levels of pre-commitment in new developments, permanent withdrawal for residential conversions and further short- to medium-term withdrawals for either commercial refurbishment or redevelopment.
“This means the supply side of the equation is set for aggressive rent growth. “
According to Azar, as demand levels continue to grow, incentive levels will fall, with strong net effective rental growth to follow.
“Sydney will remain a safe haven for offshore investors for some time to come,” he says.
Fuelled by the depreciation of the Australian dollar, record low interest rates, a transparent economy, strong forecast rent growth and some of the highest yields in the world, Savills is confident that foreign money will continue to focus on investment opportunities in Australia.