Skip Ribbon Commands
Skip to main content

News release

What now and what next for commercial real estate in Australia

The outlook through 2012 is that commercial real estate will remain on the path of recovery and offshore investors will continue to participate actively in the domestic market.

AUSTRALIA, 28 February 2012 – At a Jones Lang LaSalle research event in Melbourne – What now, what next, Jones Lang LaSalle’s Head of Research and Consulting in Australasia Dr David Rees and Head of Capital Markets Research Australia, Andrew Ballantyne addressed these questions and outlined a number of key investment drivers. 
Dr David Rees said, “The GFC has stimulated a major portfolio shift between countries, sectors and investment vehicles. The Australian real estate sector has been, broadly, a beneficiary of this shift. The relative volume of funds seeking exposure to the Australian market from offshore – and from domestic sources – has increased substantially over the past three years.
“During 2011 alone, offshore investors purchased AUD 3.7 billion of Australian commercial real estate assets which is equivalent to 29.5% of transactions by value (>AUD 5 mill), the largest percentage on record and just below the record dollar value of AUD 3.8 billion achieved in 2010.
Jones Lang LaSalle Victorian Managing Director, Andrew Wood said, “Australia has a relatively high yielding commercial real estate market which makes the country attractive for offshore investors with a lower cost of capital. We expect this trend to continue for the foreseen future.”
However the strength of the appeal of investment in the Australian property market does not rest on a single or even a small number of attributes. A range of key investment drivers are discussed throughout the Jones Lang LaSalle investment report What now, what next.
Many attractions for investment in Australia are long-term such as the transparency of the regulatory environment, the diversity of the economy and the sophistication of financial markets. Other attractions such as the yield spread, rapid growth in the resource-based states and the changing cross rates of the AUD against a range of other currencies can be expected to vary over time. As a result, sources of capital will also be subject to change.
The key question is how the relative abundance of capital will impact the Australian market. For this, we need to consider key investment drivers.
Dr Rees stated, “The lead in 2012 will be taken by the commodity-based economies of Queensland (bouncing back from the natural disasters that marred 2011) and Western Australia.

“Beyond 2012, some convergence of inter-state growth rates is forecast. The economic recovery in 2012, combined with a limited construction pipeline suggests a continuation of the recovery in rents and capital values recorded over the past two years. 
“Strong growth in the commodity-based economies of Queensland and Western Australia reinforces the perception that Australia is predominantly a play on commodities and more broadly, exposure to the robust Asia- Pacific growth outlook.”
Although the Australian market is small by global standards, Jones Lang LaSalle Research suggests that Australian investors divested around AUD 21.6 billion of offshore assets (including hotels) between 2008 and 2011. Over the past two years (2010 and 2011), the USD 12.8 billion (approximately AUD 14.9 billion) that Australians have divested offshore has been, by a big margin, the largest offshore liquidation of any country, equivalent to sales of the next two countries (UK and Ireland).

“The refocus on the domestic market and repatriation of capital freed up from asset sales represents an additional source of investment funds to be deployed domestically,” said Dr Rees.
Diversity in the economy is another key investment driver contributing to the attractiveness of the property industry in Australia.
According to Dr Rees, the Australian economy is highly diversified with a sector profile not dissimilar to the US. In the US, the four largest sector contributors to GDP in 2011 were finance, manufacturing, healthcare, and professional services. In Australia the four largest sectors were Finance, mining, manufacturing and construction.
“In comparison to the US, Australia has a larger mining sector and a smaller financial sector. Both have relatively large manufacturing sectors. Suppose we adopt the traditional economic definition of the ‘concentration ratio’ as the share of a market accounted for by the largest four producers. In the US the four largest sectors account for 55.3% of GDP which is much higher than the 41.8% that applies in Australia’s four leading sectors.
“While the mining sector has clearly been the locomotive of growth in the recent past, from a longer term perspective, it is the service sectors that have been the strong performers. Finance and Insurance is 33% larger in terms of its contribution to real GDP growth and 72% larger in terms of employment. Manufacturing, by contrast, has declined steadily as a portion of Australia’s output over the past two decades but on a sector basis, manufacturing is still the third largest contributor to 2011 GDP output after Mining and Finance and Insurance. The diversity of the economy, rather than its dependence on a few high growth sectors, accounts in large measure for the relative stability of commercial property. It is this diversity and relative stability that probably attracts many offshore investors,” said Dr Rees.
Finally, one last key investment driver is the strength of the AUD against the USD, the Euro and Sterling. This is frequently cited as a deterrent to offshore investors entering the Australian marke.  However, according to Dr Rees, the reverse has been the case.
“Australia is a price-taker in global capital markets. Therefore the AUD and domestic asset values tend to be positively correlated. A strong AUD/USD cross rate has been associated with net capital inflows into real estate because the strong AUD is a symptom of the attractiveness of Australian assets to offshore investors, including real estate investors,” Dr Rees concluded.