Australia firmly on the radar for global real estate investment

AUSTRALIA, 21 August, 2020 – Global investors have identified Australia as an important market for deploying core capital, in a recent survey by JLL of 38 global investors collectively holding close to $2 trillion of assets under management.

Half of all respondents plan on increasing their exposure to Australia by the end of 2021. Given the strong underlying drivers for logistics real estate, 81% of survey respondents plan on increasing their exposure to this sector by the end of 2021.

Around 84% of survey respondents expect transaction volumes to recover by the second half of next year. Deeper analysis shows 32% expect recovery in 2H 2020, while 52% expect recovery in 1H 2021. Nonetheless, with an expected recovery over the next six to 12 months, many investors have identified Australia, Japan, South Korea and China as the markets most likely to observe an increase in transactional activity into 2021.

JLL’s Head of Capital Markets – Australia, Fergal G Harris said, “The survey results support our view that investors remain positive towards Australia and they have capital to deploy into core opportunities. The results also tell us that investors are subscribers to the long-term office demand story with investment grade office expected to remain central to investment strategies going forward.

“While the survey showed a strong bias by investors to increase their focus on alternative property sectors, there was a clear commitment to traditional core real estate sectors. Around 82% of those surveyed globally are planning to retain or increase their exposure to the core segment by the end of 2021 and only 6% expect to reduce their exposure. 

“The long-term economic growth projections are strongest for the Asia Pacific region. Investors are seeking exposure to markets where they can generate strong risk-adjusted returns. Australia’s high level of transparency and low volatility of returns make it very attractive for core investors wanting exposure to the Asia Pacific growth story,” said Mr Harris.

JLL’s Head of Capital Markets, Industrial and Logistics - Australia, Tony Iuliano said, “The current strength and resilience of the industrial & logistics sector is reflected in the survey results. Investor demand for modern logistics assets has remained firm with multiple capital sources seeking to enter Australia or increase their industrial & logistics exposure.

“Australia’s e-commerce penetration has accelerated through COVID-19 and has the potential to increase further. The delivery and storage of these goods is one of the ingredients supporting occupier demand for industrial & logistics facilities.

“One of the challenges for investors wanting exposure to the Australian industrial & logistics sector is size of the investable universe. We estimate the investable universe is approximately $90 billion and most investors in the sector are looking to build a portfolio of between $1.0 billion and $1.5 billion,” said Mr Iuliano.

JLL’s Head of Research – Australia, Andrew Ballantyne said, “The office sector investable universe is larger at approximately $320 billion. However, we have seen investors with narrow investment mandates find it challenging to deploy capital into the Australian office sector.

“The long WALE thematic has strengthened as a result of COVID-19. For a number of investors, security of income has become the most important factor and we are seeing capital sources explore long WALE opportunities across metropolitan office markets,” said Mr Ballantyne.

In the third quarter of 2020, an unpredictable environment remains the biggest challenge in deploying capital, say investors. Approximately 60% cited uncertainty as driving a pause in their transaction activity. Specifically, underwriting assumptions, rent assumptions, vacancy forecasts, cost of capital and pricing uncertainty were cited as the primary reasons stopping investors deploying capital in the current environment.

As investors review their Asia Pacific strategies, JLL expects several key themes to gather momentum into 2021:

• COVID-19 accelerating pre-existing trends: Investors are planning to increase their exposure to logistics (81%), multifamily (58%), and alternatives (44%) between now and the end of 2021.
• Focus on capital value preservation: 82% of investors are planning to retain or increase their exposure to the core sectors, such as offices, by the end of 2021 with only 6% expecting to reduce their exposure.
• Going beyond core: While core (income investments) sectors remain central to strategies, investors also plan to increase their activity in the core plus (growth and income investments) by 42% and value add segments by 49% (growth investments) in 2021, due to both the limited opportunity to acquire assets and a rebalancing of relative risk and volatility.

Transactional diversity to mature: Direct acquisition in private markets will remain the primary route for most investors, but many are increasingly looking towards different transaction structures in order to gain and increase their exposure to real estate. 32% of respondents are planning to increase exposure to platform or entity deals, while 29% plan to increase their activity in debt markets.