Australia’s alternate CBDs come first for overseas investors

Stock shortages and pressure to diversify are forcing overseas investors to look beyond Australia’s major East Coast cities to the country’s other CBD markets.

While the hubs of Sydney and Melbourne continue to power Australia’s investment markets, attracting record-breaking capital from both local and offshore investors, stock restrictions are encouraging investors to increase their exposure to Adelaide, Brisbane and Canberra.

Singapore-based Mapletree is the latest foreign investor to expand their mandate with the record-breaking A$202.5 million purchase of Adelaide’s flagship office building ANZ House.

The Mapletree deal was the largest transaction in Adelaide’s CBD history, and testament to the city’s burgeoning CBD landscape and growing reputation on the world stage.

“Offshore groups are finding it increasingly challenging to deploy capital in the core eastern seaboard markets, especially in the A$150 million to A$250 million price point where liquidity is exceptionally deep,” said Stuart McCann, JLL’s Head of International Capital, Australia.

JLL saw more than A$24 billion of offshore capital bid on all of its major campaigns in 2017. A$21.3 billion of this capital failed to find deployment.

As a result, foreign investors are casting their nets wider, looking to markets such as Adelaide where they can “gain exposure to higher yielding prime grade assets which are also underpinned by very defensive capital value rates per square metre,” explained McCann.

According to JLL Research, average prime midpoint yields in Adelaide have compressed by 213 basis points from the top of the investment cycle in mid-2009 to now. As at 4Q17, average prime midpoint yields are at 6.88 percent, tighter than the pre-GFC cyclical low of  seven percent.

In 2017, the Adelaide market saw new entrants such as Credit Suisse Asset Management, AEP Investment Management and more recently, Mapletree, according to Jamie Guerra, Managing Director of JLL’s South Australian business. “We expect that Adelaide will continue to attract global capital in 2018 as the physical markets improve and provide greater confidence in leasing activity.”

With the tide of offshore capital flowing into Australia expected to continue this year, Australia’s secondary cities will continue to benefit.

Late 2017, AMP Capital completed the largest single-asset retail transaction ever recorded in Australia with its purchase of a 50 percent stake in Indooroopilly Shopping Centre in Brisbane for A$800 million.

Investment is also strong in Canberra. Asian-sourced capital accounted for 45 percent of total capital flow in 2017, including from the purchase 50 Marcus Clarke Street for A321 million in the first quarter. Sales volumes totalled A$861.7 million for the year across 19 transactions.

The trend is playing out across the world, with high prices in gateway markets forcing investors to look to cities they previously wouldn’t have considered.

Secondary markets accounted for 50 percent of all U.S. office transactions in 2017, up from 45.9 percent in 2016, according to JLL’s latest U.S. Investment Outlook report.

“Foreign investors will continue to pursue higher-yielding investments and gain deeper understanding of markets outside of the key gateways – both in Australia and globally,” says McCann.