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News release

Asian private equity firms and sovereign wealth funds will be active participants in Australia’s office market in 2011

Jones Lang LaSalle’s Office Investment Market Review – vendors, purchasers, product, yields and buyer profile for 2011


AUSTRALIA, 28 MARCH 2011 – Asian private equity groups and sovereign wealth funds will continue to be active participants for prime office assets above $100 million across Australia’s Eastern Seaboard in 2011, according to a new report by Jones Lang LaSalle.
 
This follows strong interest from this buyer group during 2010, with the majority of new offshore entrants into the Australian market in 2010 originating from Asia.
 
Figures from the Office Investment Market Review show that over 40% of commercial property transactions in 2010 were to offshore investors, equating to $2.4 billion worth of investment.  This represents a nearly three-fold increase from the $846 million recorded in 2009.
 
The report says new entrants into the Australian commercial property market in 2010 from Asia included:
  • K-REIT – In 2010, K-REIT acquired two Australian office buildings – 275 George Street, Brisbane for AUD 166 million and 77 King Street, Sydney for AUD 116 million;
  • NPS – The National Pension Service of Korea (advised by the Carlyle Group) acquired RBS Tower at Aurora Place at 88 Phillip Street, Sydney for AUD $685 million;
  • RREEF – RREEF, on behalf of KWAP from Malaysia, acquired 737 Bourke Street in Melbourne for AUD 113 million.
Managing Director, Investments and Advisory at Jones Lang LaSalle, John Talbot said, “Singapore-based K-REIT’s investment in the Australian market in 2010 was their first direct investment outside Singapore. Similarly, NPS and KWAP made first time investments in 2010.
 
“In 2011, we will see more active investors in the market and increased deal flow across the Australian office markets.  Offshore investors will continue to compete for prime-grade assets above AUD 100 million, with further participation from Asian private equity groups.
 
“Superannuation and wholesale funds with buy mandates re-emerged in 2010 and will be active participants in the year ahead.  There were selective acquisitions from A-REITs in 2010, and a number of well-capitalised AREITs will be looking to add quality assets to their portfolio.
 
“The banks and other financiers have adopted a disciplined approach to non-performing loans and assets in breach of covenants. With greater depth to the buyer pool and increased certainty in terms of pricing, banks will be more aggressive in disposing of troubled assets.  This will result in an increase in secondary-grade stock coming onto the market.
 
“Offshore investors continue to be attracted by the favourable conditions in the Australian commercial property market such as positive fundamentals, limited supply and the prospect of early cycle rental growth and yield compression,” Mr Talbot said.
 
The main findings of the Office Investment Market Review include:
 
Vendors:  In 2010, asset values stabilised and investor demand recovered. Indeed, in the second half of the year, most of the major AREITs reported a marginal uplift in valuations for prime-grade office assets.  The vendor-buyer gap closed throughout the year and transaction volumes improved.  In total, property companies/developers accounted for 31% of the transactions by values, unlisted funds accounted for one-third of the transactions by value in 2010, AREITs were the vendor in 6.1% of sales, private companies and investors (10%) as well as superannuation funds (7.9%) were more active vendors than AREITs.
 
Purchasers:  Investor confidence, which reached a trough in late 2009, continued to improve in 2010.  Over 40% of the transactions in 2010 or AUD 2.4 billion worth of commercial property was acquired by offshore investors.  This represents a substantial increase from the AUD 846 million recorded in 2009.  In  2010, almost 93% of the offshore investment into commercial property occurred in NSW (44%), Victoria (31%) and Queensland (18%). AREITs were the second largest purchaser cohort by value, accountinkg for 14.1% of transactions in 2010. Private investors accounted for 11.1% of the transactions by value in 2010, down from the 37.7% recorded in 2009. Victoria accounted for 55% of the purchases by number and 46% by value. In total, superannuation funds accounted for 9.8% of the transactions in 2010.
 
Product:  Across the markets, the majority of investors remained risk-conscious in 2010. Comparing the different states, NSW and Victoria accounted for 44% and 31% of all transactions by value.  They were followed by QLD (18%), SA (3%), WA (3%) and ACT (1%).  There was an increase in transactions above AUD 100 million.  IN total, 17 transactions above AUD 100 million were recorded, well above the seven transactions recorded in 2009 and the average of 13 transactions annually between 2003 and 2007.
 
Yields:   Yields peaked in late 2009 across the Australian CBD office markets. In 2010, prime equivalent yields have compressed by an area-weighted average of 26 basis points.  Despite the divergent outlook forecast for vacancy and rent across Australian CBD office markets, the level of yield compression has been comparable between markets.
 
Buyer profile – 2011:  A number of Asian private equity firms and sovereign wealth funds have buy mandates and will be active participants for prime-grade assets above AUD 100 million across the Eastern Seaboard.  There is an increasing number of buy mandates from superannuation funds, wholesale funds, AREITs, syndicates and an every-increasing number of boutique fund managers.  Private investors will continue to seek out counter-cyclical opportunities.