SIGNS OF PRICE STRESS AMONG OFFICE BUYERS
Written on the 16 February 2016 by Nick Nichols
THE international love affair with Australia's office market is starting to price some investors out of the market.
While Colliers International says this isn't going to stop the offshore rush in 2016, it will put more pressure on prices because Australian institutions remain the largest holders of CBD offices in the country with a long-term hold strategy.
Colliers' latest CBD Office Research and Forecast report has revealed that offshore buyers have doubled their share of the Australian office market over the past five years to 17 per cent, and that the trend is not about to reverse any time soon.
Offshore buyers accounted for 67 per cent of CBD office building sales in 2015 with Australian investors becoming net sellers of the prime assets.
"However, yield compression is continuing to occur and some investors are beginning to see Australia as too expensive," says Nerida Conisbee, Colliers' national director of research.
"We consider this unlikely to lead to a significant reduction in offshore investment in CBD office investment in 2016," she says.
"Right now offshore investors overwhelmingly see Australia as a good market to be in and made a direct push to enter the market or dramatically boost their portfolios."
The office market which traditionally is dominated by investors from Singapore, the US and Canada, are now being overshadowed by Chinese investors, says the report.
However, the top five owners of office assets remain Australian institutions, which control more than 20 per cent of total CBD stock and are traditionally long-term holders of these assets.
"The ability of offshore groups to purchase prime CBD office properties is going to become increasingly difficult unless an acquisition of a major owner is undertaken," says Conisbee.
Following a series of one-on-one interviews with 10 major offshore investors, including Deutsche Bank, Invesco and GIC, the Colliers report has found while there is some resistance to price pressures, overall sentiment remains strong towards further investments in Australia.
Stephen Philp, the head of capital transactions with TH Real Estate, is one who has a tempered view of the Australian market which he describes as a 'compelling' investment story in previous years due to its perceived value'.
"Despite higher pricing levels, Australia's location in Asia and relative liquidity will continue to attract foreign investment," Philp says.
He adds that TH Real Estate believes the industrial market has become too expensive in light of rental growth expectations.
The Colliers report says exposure to Australian property 'is now considered to be a necessity for most large global players'.
"For some, it is a low risk way to have Asia Pacific exposure in a portfolio," says Conisbee.
"A decade ago, Australian property was not on the radar for many global investors and it was at this time that Australia represented exceptionally good value when compared to similar options.
"Australia's exceptional economic growth record remains one of the main reasons for such strong interest in Australian property.
"However the sophistication and maturity of our property markets are also a factor."
Deutsche Bank's assistant vice-president Natasha-J Lee says the perceived challenges faced by the office market continue to hover around 'softness in the economy as a result of the slowdown in the mining sector, as well as the generous incentives being offered to tenants'.
"Hedging costs continue to be a drag on returns for our investors, although this has improved," she says.
Lee says Deutsche's preferred investments include office assets in Sydney and Melbourne, logistics with long leases and upside rent potential, and non-discretionary suburban retail such as neighbourhood centres.
Author: Nick Nichols