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News release


2014 – The rise of High Net Worth individuals investing in Australia’s commercial property market and increasing attention from Sovereign Wealth Funds

JLL Report: 2014 sees emerging investors into real estate, while commercial property markets will be impacted by divergent and sometimes contradictory forces

​AUSTRALIA, 8 APRIL 2014 – JLL is forecasting a year of change for Australia’s commercial property market in 2014, with emerging investors being one of the major changes due to a rise of High Net Worth individuals and Sovereign Wealth Funds increasing their investment in the Australian market.

JLL’s latest report, 2014: The Year of the Push-Pull Market states that Australia’s commercial property market will continue to be subject to divergent forces, with some new factors and some continuing from 2013.

The report’s author, Dr David Rees, Australasian Head of Research and Consulting at JLL said, “The push factors that will lead to increased capital flow into real estate in 2014 include the growth of High Net Worth (HNW) individuals, the expansion of Sovereign Wealth Funds (SWF), growth of funds under management (FUM) by superannuation funds, increasing portfolio allocations by investors to real estate and away from equity markets, low interest rates, a premium paid for market transparency and an ageing population.

“The potential new factors impacting on investment into Australia are the rise of HNW individuals and the growth of the SWF sector, while the growth of FUM and the portfolio allocation tilt by investors towards real estate are a continuation of the growth in those two trends from 2013.

“Opaque regulatory regimes, uncertain property rights and rising wealth across the Asia Pacific region are a stimulus to the HNW market to seek security and diversification in portable assets, such as art works and gold bullion, and immovable but tangible assets, such as real estate.

“It is estimated that Ultra-high net worth individuals (UHNW), with wealth above USD 30 million, have a large concentration in the Asia Pacific region at 44,000, close to Europe (58,000 UHNW individuals) and about half of the 70,000 UHNW individuals estimated in the US.

“The estimated worth of UHNW individuals in Asia Pacific is $6.59 billion, so we can see the scale of capital in Asia looking for a home.

“Globally, those UHNW individuals who have made their money from real estate continue to hold around 60% of their wealth in real estate. Real estate has been a key driver of wealth creation for many HNW individuals. Typically HNW individuals are active asset manager and therefore their criteria for asset selection will often differ from conventional institutional investors.

“In 2014, development opportunities offering capital growth and often smaller capital value high yield opportunities are likely to be attractive to this category of investors.

“Sovereign Wealth Funds (SWF), globally, have doubled in size since 2007 and many are lifting their weightings to real estate. Many are still considered to be underweight in this area, so the potential for growth is strong,” said Dr Rees.

The ‘Push’ factors leading to increased capital flow into real estate markets in 2014 are:

1. Sovereign Wealth Funds (SWF) expand in number and size: The SWF sector has grown from an estimated USD 3.3 trillion in December 2007 to USD 6.1 trillion in December 2013.
2. Global growth of High Net Worth (HNW) individuals: Real estate has been a key driver of wealth creation for many HNW individuals.
3. Growth of FUM:  Despite the headwinds of the GFC, since end-2007 superannuation funds under management in Australia have increased by 45% (or $525 billion) to $1.7 trillion.  If we assume a 10% allocation to real estate, this implies an additional $53 billion to be allocated to real estate over the past six years from this source alone.
4. Portfolio allocation tilt toward real estate:  A 1% shift away from equity and bond markets implies a 19% rise in real estate exposure if we measure the commercial real estate investable universe.
5. Low interest rates:  Corresponding to long-term low global economic growth have stimulated a global hunt for yield and, in particular, a rise in demand for stable yield assets, with inflation hedging and long duration attributes.
6. Increased premium paid for market transparency and a limited number of transparent markets in the Asia Pacific region:  Australia and New Zealand are transparency leaders in the Asia Pacific region and globally.
7. Ageing population:  The Asia Pacific demographic profile is diverse, but the regional economic heavyweights – Japan, China and Singapore, all have ageing populations and substantial, sometimes funded, sometimes unfunded, pension liabilities over the next few decades.  Ageing populations imply an increased demand for real estate from the both the investment and tenancy perspectives.

Real estate ‘pull’ factors – attracting capital into selected markets: 

Dr Rees said the ‘pull’ factors in 2014 that would lead to increasing demand for real estate assets in selected markets are all about new benchmark metrics that will become more relevant as the year progresses.

“It is all about spreads and if they are the new ‘normal’ or is there more adjustment to come in 2014?

“The wide prime yield spreads to Commonwealth inflation-indexed bonds imply generous risk premiums relative to past history and relative to many offshore real estate markets.

“The wide yield spreads between real estate markets, for example between CBD and non-CBD office markets, and sectors offer generous incentives to consider alternative locations and sectors.  Within individual markets, spreads remain wide between prime and secondary grade assets.

“Low interest rates and the falling cost of debt make yield accretive investment, and development, feasible and sometimes imperative in order to attract new customers and retain existing tenants.  In a falling real interest rate environment potentially all real estate assets are under-capitalised,” said Dr Rees.

The benchmark metrics to be reviewed in 2014 include:
a. Yield spreads between CBD markets will compress
b. Yields spreads between prime and secondary grade assets will compress without reverting to pre-2008 levels
c. Incentives will contract but are likely to remain higher than historically
d. ‘Normal’ office market vacancy rates will be higher
e. Building life-cycles will increase under the impact of low interest rates, but refurbishment cycles will contract under the impact of new technology and changing tenant and environmental sustainability requirements
f. Household spending patterns/saving rates will revert closer to long-term norms
g. Investor return expectations will adjust to a lower growth economy