Skip Ribbon Commands
Skip to main content

News release

Australia

Offshore investment hits a record high in 2012, while A-REITs acquire over $1 billion worth of product for the first time since 2007

Jones Lang LaSalle Report: commercial property will remain attractive relative to other asset classes in 2013


AUSTRALIA, 21 FEBRUARY 2013 – Australian Real Estate Investment Trusts (A-REITs) were back on the acquisition trail in 2012, acquiring approximately $1.2 billion worth of Australian office assets – the first time volumes were above the $1 billion mark since 2007. 

According to Jones Lang LaSalle’s Office Investment Market Review and Outlook  2013, A-REITs were the third largest buyer cohort (13%) after offshore investors (42.9%) and unlisted funds (16.2%).

The Report highlights the performance of Australian commercial property markets in 2012 as a year of solid returns, the highest level of major office transactions since 1987 and an all-time record for offshore investment.

Head of Office Investments – Australia at Jones Lang LaSalle, Rob Sewell said commercial property would remain attractive relative to other asset classes in 2013.

“The investment case for Australian commercial property over other assets classes remains compelling.

“In 2012, Australian property companies raised $1.4billion in the corporate bond market – the highest figures since 1999.

“A-REITs and unlisted funds have diversified their sources of funding and are less reliant on the domestic banking sector.  The corporate bond market has enabled well-rated groups to cut borrowing costs and extend maturities.

An investment is typically funded by a combination of equity and debt, assuming an investor has a cost of equity of 9.50% and is using 30% leverage.  The weighted average cost of capital (WACC) has fallen by 55 basis points to 8.20% over the past 18 months.

“A reduction in the cost of debt has reduced the WACC and made commercial property investment more attractive,” said Mr Sewell.

Despite a volatile investment market in 2012, the numbers out of the Australian office markets were firm:

• Australian commercial property returns were solid.  Jones Lang LaSalle’s total return index for the five main CBD office markets and Canberra delivered a result of 10.05% in 2012;

• Australian commercial transactions were the highest since 1987.  In 2012, $9.38 billion worth of office transactions were recorded – the highest levels in the past 25 years since detailed monitoring by Jones Lang LaSalle commenced.  Excluding the de-listing of CQO and the $2.1 billion capital commitment  to the International Towers at Barangaroo South,  transaction volumes were $5.63 billion – a similar result to 2011 transaction levels;

• Offshore investment in Australian office markets recorded a new record high.  In 2012, offshore groups accounted for 42.9% of total office transactions – an all-time record.

• A-REITs acquired approximately $1.2 billion worth of office assets in 2012.  This is the first time volumes were above the $1 billion mark since 2007.  In 2012, Australian property companies raised $4.1 billion in the corporate bond market – the highest figure since Bloomberg data began in 1999.

Mr Sewell said, “The large volume of sales in 2012 plus a massive uplift of the pricing of office REITs is an indication of the popularity of the office sector. 

“We saw a clear change in office markets in the third quarter of 2012.  What we saw in the markets up until this point was a lack of confidence, a lack of commitment by managers to transact which led to a lack of decision making.

“Investors looking for secondary assets were wary of the leasing markets and the costs of attracting and retaining tenants. However in the fourth quarter, we saw in particular in the Sydney CBD a number of secondary assets being offered which were hotly contested.
 
“The top end of the market offered very few opportunities in major cities to acquire prime assets other than stock created by developers.  This translated into some of these investors having to rethink strategies and consider prime assets in secondary locations.  A clear example of this was the acquisition by REST of the Eclipse Tower in Parramatta for $167million.”
 
Mr Sewell said the challenge for office markets in 2013 would continue to be a lack of investment-grade product.
 
“There is a large amount of capital chasing prime office assets which will result in transactions being done at premiums above book values. Those holding these assets are unlikely to be sellers.  Pricing will have to be compelling to see assets prised from these owners.
 
“Core investors will not have the choice of which market they would prefer to invest in as opportunities will be scarce. Any of the major CBD markets are in good shape with varying risks,” said Mr Sewell.
 
Head of Capital Markets Research – Australia at Jones Lang LaSalle, Andrew Ballantyne said there is a disconnect between the physical and investment markets. This disconnect was likely to persist in 2013.
 
“The leasing markets are challenging. There will be limited organic growth across corporate Australia in 2013 and net absorption will be well below trend. Nevertheless, the occupancy rates for Australian office assets are amongst the highest in the world,” said Mr Ballantyne.
 
As an illustration, the vacancy rate in Australia is 8.8%, a rate which is much lower than Americas (16.0%), Europe (9.6%) and the Asia-Pacific (11.0%).
 
Mr Ballantyne said, “A survey in January this year by the Association of Foreign Investors into Real Estate (AFIRE) revealed that Australia ranks fourth globally as the country providing the most stable and secure real estate investments.
 
“Australia remains very attractive in a global context. In 2013, however, I expect that the pendulum between offshore and domestic investors will start to move. The current reporting season has highlighted that A-REITs are looking to acquire good quality office space assets. Over the next 12 months, I expect that A-REITs will be more prevalent office buyers of office buildings than offshore investors,” said Mr Ballantyne.

 

Highlights from the Office Investment Market Review and Outlook 2013:
 
Buyers and sellers in 2012:

Transactions:
While the total value of transactions was at a record high in 2012, there was a divergence between transaction volumes in CBD and non-CBD office markets.  Offshore investors, large unlisted funds and superannuation funds are the price setters in the Australian commercial property markets.  However, there has been limited interest from these buyer cohorts in the non-CBD office markets.  Private companies and investors are the dominant purchaser group for the non-CBD office markets.

State-by-State analysis of transactions:
NSW recorded the highest proportion of transactions by value (56.5%) in 2012.  The NSW number was inflated by the International Towers at Barangaroo and the proportion of Sydney assets in the CQO portfolio.  The second highest proportion was recorded in Queensland (15.3%), followed by Victoria (15.0%), Western Australia (7.2%), the Australian Capital Territory (4.3%) and South Australia (1.7%).