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News release


Back to the 1990’s – Australian commercial property market shaping up for a re-run of ‘too much money chasing too few assets’

New Research Paper says transaction activity – foreign investors and super funds growth - is driving the Australian commercial property market recovery, but a return to record 2007 levels of capital values and yields not likely in the short-term

AUSTRALIA, 16 MARCH 2011 – A new Research Report by Jones Lang LaSalle says high levels of transaction activity and foreign investment in Australia are driving the Australian commercial property market recovery.  2010 marked the highest level of net foreign investment flows in Australia since 1994. Combined with the steady growth of superannuation funds and the repatriation of funds from the sale of offshore assets by Australian investors, a substantial pool of capital is now looking for real estate investments in Australia.
The White Paper, entitled “Values, Vacancies and Transaction Volumes - A Checklist of Real Estate Trends for 2011” says the market  will be driven during 2011 and 2012 by five short-term trends:
1. Increasing transaction activity
2. Offshore investment
3. Accelerating rental growth
4. Tightening yields and rising capital values and
5. Capital markets will continue to thaw
The Report’s author, Dr David Rees, Australasian Head of Research and Consulting said with superannuation assets in Australia growing by 62% between 2005 and 2010 and despite the global downturn, the volume of funds available for investment has been rising and will be a big potential driver for demand in the Australian commercial property market in 2011/2012. 
“New sources of debt are emerging, debt markets are continuing to thaw, Australian REITs have recapitalised and are reweighting portfolios back to the domestic market and there is the long term growth potential of super funds. 
“The ‘Wall of Money’ that was evident in Australia from 2000 to 2007 is now re-emerging.  After going offshore, the money has now been repatriated back to Australia and we are now looking at a re-run of the 1990’s where ‘too much money was chasing too few assets’.
“In 2006, Australian investors invested aggressively offshore, with a net balance of $13 billion in offshore asset purchases compared to their sales in offshore markets.  This net balance dropped to $3 billion in 2007 but nevertheless Australians continued to be net buyers offshore.  In contrast, offshore investors returned to the Australian market in 2007as net buyers, with a net balance of positive $2 billion between their purchases and sales in the domestic market. 
“Since 2008, Australians have been divesting offshore and repatriating capital while foreign investors have continued to be net buyers in the Australian market.  The net balance of Australians selling assets offshore and foreign investors bringing capital in was $2 billion in 2008, $3.4b in 2009 and $4.2b in 2010.
“With offshore investment flows now reversed, with AREITs re-weighting portfolios back to the domestic market and a strong inflow of offshore capital into Australia, the mismatch between the flow of funds and available assets is likely to persist and have implications for the property market,” Dr Rees said.
Managing Director, Investments and Advisory, John Talbot said these implications could include asset price inflation or a bubble effect, increased development activity, growing interest in alternative forms of real estate exposure and an early return to offshore investment by AREITs.
“This mismatch between capital and assets could kick start development as investors look to build assets if they can’t find suitable assets to buy.  This could apply to funds, which could move from passive investments to more active development activities. We are also likely to see a growing interest in non-core real estate exposure in the form of health and aged care, tourism, rural and residential developments.
“It has been evident for some time that the buyer pool has deepened and predictions for this year are that transactions will go higher than 2010, which was already the fourth highest level of transactions on record. Transaction levels in 2010 for assets over $5 million in the Australian office, retail and industrial sectors hit $12.7 billion. Offshore investors accounted for 19.9% of commercial transactions in 2010.
“Across Asia Pacific, Jones Lang LaSalle expects a 15 to 20% rise in transaction volumes in 2011 compared with 2010,” Mr Talbot said.
Capital values and yields won’t return to record 2007 levels for a number of years
Dr Rees said the pace of the Australian commercial property market recovery will be dictated by global financial markets and will continue to be slow and steady, with capital values and yields not returning to record 2007 levels for a number of years in some markets, although the pace of recovery will vary sharply between individual markets.
“We have gone from the market boom (2002-2007) to the downturn (2008-2009) and have come out of the most severe commercial property downturn in Australia since 1992.
“Following the trough in late 2009, the market is now in its fifth quarter of recovery.  2010 was a year of consolidation for the Australian property market and the recovery will accelerate in 2011 and 2012.
“However, the pace and profile of the recovery will depend heavily on events in financial markets and a recovery in investor confidence, because the downturn originated in the financial markets and factors outside of the property market. 
This is in stark contrast to the downturn in the early 1990’s, which was caused by domestic factors of supply/demand rather than being ignited by a financial shock,” Dr Rees said.
Three year forecast for yields:
Yields are already tightening in expectation of accelerating rental growth during 2011 and beyond.  Yields tightened across most markets in 2010 and the process is expected to accelerate during 2011. However, we will not see a return to the unusually tight yields recorded in 2007.
“Relative to previous cycles, yields have tightened early in the current upturn, reflecting low peak vacancy rates, the mild economic downturn and cut-backs in new construction.  However, prime yields will not return to the very tight 2007 levels at any time on a ten-year view.  Similarly, capital values will take time to return to 2007 levels in most markets.
“Investors who wait for further yield decompression, and vendors who are waiting for yields to return to 2007 absolute or relative levels, risk disappointment,” Dr Rees said.
Three year forecast for rents:
Jones Lang LaSalle forecasts for rental growth over the next three years (Q42010 to Q4 2013) are 6.5% p.a. growth for national office prime gross effective rents, 3.4% p.a. for regional shopping centre face rents and 3.7% p.a.for national industrial prime face rents.
“Yields will tighten steadily and capital values will rise as rental growth accelerates and risk premiums shrink.  The theme across all three sectors – office, industrial and retail – is of limited supply and a positive outlook for growth in demand,” Dr Rees said.
Three year forecast for capital values:
“Capital values are forecast to make a steady recovery over the next three years, climbing to a forecast 18% growth for prime CBD office assets on a national area-weighted basis.  This follows a 5% increase since the end of the downturn and the start of the recovery phase (Q42009 to Q4 2010) and a drop of 24.9% during the downturn (Q42007 to Q42009),” Dr Rees said.
Longer term macroeconomic trends to look for during 2011 and beyond – ageing population and the transport revolution
Dr Rees said, “Over the past two years the property industry has had to focus on short term issues. With the beginning of a cyclical recovery it is possible to look over the parapet at the longer term trends that will have an influence on market performance beyond 2011.
“The first cohort of baby boomers turns 65 during 2011.  The ageing population is one of the more predictable of all trends but from 2011 the pace of change will accelerate.  The implications of this for the commercial property sector is that non-CBD office markets, neighbourhood and sub-regional shopping centres and retirement accommodation are all potential beneficiaries of an ageing population. 
“Many of these asset classes have the potential to deliver attractive returns in the future as the discount of these assets to prime grade assets declines.
“The transport revolution will also have implications for investors and tenants in the industrial logistics sector.  A new generation of container ships and aircraft (A380 and the Boeing 787-8 Dreamliner) will drive a re-rating of selected destinations and transport nodes,” Dr Rees said.