Japan takes the lead in Australia's real estate investment inflows

Foreign direct investment (FDI) in Australian real estate had a taste of the late 1980s to it in 2023 as Japanese investors poured funds into the sector, buoyed by the East Asian country's relatively low interest rates and the attractiveness of Australia's build-to-rent (BTR) sector.

The latest CBRE's Australia Capital Flows report found Japanese buyers acquired more than $2 billion in Australian real estate assets last year, well up on the $140 million invested in 2022.

This placed the country ahead of last year's leading source of foreign real estate investment, North America, as well as Singapore and Hong Kong which were second and third placed respectively in 2022. 

The sharp rise in Japan's presence was in contrast to a 17 per cent decline for North American investment to $1.6 billion, and a 65 per cent drop in Singaporean investment to $1 billion, which was also a similar level to inflows from Hong Kong.

European investments in Australian real estate also fell to $180 million, in a year when Australia's overall investment in real estate - across the office, industrial, retail, hotel and living sectors - was down 31 per cent year-on-year at $24.1 billion.

CBRE’s data shows Japanese investors were most active in the living and office sectors in 2023, with major investments including Mitsubishi Estate’s investment in Mirvac’s $1.8 billion BTR venture and its joint purchase with Ashe Morgan of the 60 Margaret Street office tower in Sydney.

It is worth noting that earlier in the year, Mitsubishi struck a deal to sell its stake in Australia’s first Waldorf Astoria Hotel in Sydney's Circular Quay to the Forrest family's investment vehicle Tattarang.

Japan’s largest homebuilder Daiwa House was another major player in 2023 after teaming with Lendlease (ASX: LLC) to develop a 45-level BTR tower as the group’s Melbourne Quarter project.

"Ultra-low interest rates in Japan have given those investors a competitive advantage compared to other countries and Australian group," says CBRE’s Australian head of capital markets research, Tom Broderick.

He says the three aforementioned investments make up around 85 per cent of the $2 billion-plus worth of inflows coming from Japan last year.

"These offshore investors, particularly the big institutions like Mitsubishi Estate, they look for bigger transactions so there's definitely chunky deals that occur," he says.

"From year to year that can affect and skew the numbers, but what I can say is we haven't had consistent Japanese investment over the last decade into Australia - it's definitely more of a recent theme.

"The US has a huge multi-family market, what we'd call build-to-rent, and lot of these Japanese investors have invested in that over time. So they've got experience, particularly in a Western market like the US, and so I think that is why they're relatively comfortable investing in Australia despite the fact that it's a relatively new sector."

Broderick notes that repricing in some sectors continued to limit overall deal flows in 2023. There was a 13 per cent decline in activity for the industrial and logistics segment, even though the sector recorded the highest deal flow of any sector at $6.3 billion.

The sharpest drop was for the office sector with a 65 per cent decline, which CBRE attributes to an ongoing lack of consensus on fair value between buyers and vendors.

Retail property also saw a significant drop of 21 per cent in 2023, however Broderick says a lack of larger transactions appeared to be the main factor for this decline with private investors still active at the smaller end of the market.

On a more positive note, Broderick highlights the living and hotels sectors observed an increase in transaction activity, up 39 per cent and 11 per cent respectively.

CBRE is forecasting deal activity to begin trending up this year before a resurgence in 2025.

"The outlook for interest rates in Australia has improved significantly in recent months, with the potential for multiple cuts in 2024. As such, we anticipate an acceleration of investment activity in the second half of this year," says CBRE’s Pacific head of capital markets, Flint Davidson.

A CBRE survey of investors reveals that industrial and logistics remains the preferred sector within property, where capital values have remained stable with yield softening being offset by elevated rental growth. 

Almost a quarter of respondents are also targeting residential in 2024, with build-to-rent, build-to-sell and student accommodation particularly favoured by investors. Around one in five identified office property as their preferred sector, given its discounts to peak pricing.