How will Australian office investment mandates be satisfied in 2018?

JLL assesses the volume of unsatisfied capital from major sale campaigns in 2017 and finds depth of capital remains deep, which could benefit non-suburban CBD markets in 2018, particularly in Sydney and Melbourne.

May 01, 2018

AUSTRALIA, 18 April 2018 – Global real estate services firm, JLL has assessed the volume of unsatisfied capital in Australia's office investment market and estimates that during 2017 there was over $6 of capital chasing every $1 worth of assets.

To gauge insight into the current depth of capital and the short-term demand for real estate, JLL analysed the number of under-bidders on major sale campaigns in 2017.

The results, published in JLL's latest report, Australian Office Investment Review and Outlook 2018, found that for a representative sample of assets that traded for in excess of $100 million there was $6.3 of capital for every $1 of investment product.

Head of Office Investments – Australia, Rob Sewell said, "This demonstrates the depth of Australia's office investment market and the unsatisfied capital that is looking to be deployed in 2018. The diversity of capital sources is unprecedented and investor demand for assets across the risk spectrum remains firm.

"Offshore investors remain active participants in Australia, accounting for half of transaction volumes by value in 2017. New sources of capital emerged in 2017 with Mitsubishi Estate (through CLSA) representing the first wave of Japanese capital seeking exposure to Australia's office sector.

"The net capital flow into the Australian office sector over the past five years (2012-2017) was $24.2 billion.  To put this figure in context, we estimate the market value of the 19 CBD markets in Australia is approximately $260 billion.

"The market value of non-CBD office markets is estimated at $65 billion, so we expect to see these markets as viable investment destinations in 2018 for a diverse range of capital sources. 

"Domestic and offshore investors were seeking exposure to metro markets in 2017 and while non-CBD markets only represented 33% of sales in 2017, we expect interest from a diverse range of capital sources in 2018. 

"The investment case for the Sydney and Melbourne non-CBD markets is particularly strong, with low vacancy, minimal development activity and rental growth continuing.

"The other factor we will see in 2018 is a re-rating of non-core sectors, as unsatisfied institutional capital looks to alternative real estate assets, including student accommodation, retirement villages and medical centres," said Mr Sewell.

Australia expected to be a beneficiary of Asia Pacific 'first movers' for increasing allocations to real estate:

JLL's Office Investment Review and Outlook 2018 states that Australia is benefitting from two major investment themes – higher allocations to real assets and the higher allocations going into the Asia Pacific region.

Head of Research – Australia, Andrew Ballantyne said, "According to surveys, the target allocations in institutional investment portfolios have now surpassed the 10% threshold for real estate and higher allocations to real assets will remain a relevant theme in 2018.

"We also expect global investors domiciled in Asia Pacific to be first movers in tilting their allocations to Asia Pacific. As the most transparent real estate market in the region. Australia will be a beneficiary of this allocation trend."

Transaction Volumes and Foreign investment:

Transaction volumes in Australia's office markets reached the third highest on record in 2017, at $16.2 billion.  Offshore investors were active in both buy and sell opportunities.  

The most active offshore buyers in 2017 remained Singapore (18.2%), Hong Kong (7.1%) and the US (8.5%).  

JLL's Head of International Capital for Australia, Stuart McCann said, "Singaporean investors continue to remain Australia's largest source of foreign capital in our office markets and in 2017, we saw a clear trend from some of the major groups to broaden their investment mandates to include more markets, beyond the traditional focus of Sydney and Melbourne.

"Singaporean groups were responsible for the largest office transactions in not just the Melbourne CBD, but also in Brisbane, Adelaide and Perth.

"Hong Kong investors will remain very aggressive for the right opportunities, as prices there have risen sharply and prime yields compressed to below three percent, driving investors overseas to seek better-priced opportunities," said Mr McCann.

JLL expects Japanese investors will become a more dominant force over the next few years. Japan has some of the largest pools of savings in the world and has a negative interest rate environment, which is resulting in Japanese investors looking offshore for yield and for diversification benefits.

Mr McCann said, "In 2017, there was a resurgence in Japanese capital looking into the Australian market, with over $400m in transactions. While these transactions were completed by one major investor, we are working with a large number of other Japanese groups which are looking to invest."

The diversification strategy for Japanese pension funds remains in its infancy strategy and the flow of outbound real estate capital from Japan will have a major impact on global real estate markets in 2018, including Australia.

About JLL

JLL (NYSE: JLL) is a leading professional services firm that specialises in real estate and investment management. A Fortune 500 company, JLL helps real estate owners, occupiers and investors achieve their business ambitions. In 2017, JLL had revenue of $7.9 billion; managed 4.6 billion square feet, or 423 million square meters; and completed investment sales, acquisitions and finance transactions of approximately $170 billion. At the end of 2017, JLL had nearly 300 corporate offices, operations in over 80 countries and a global workforce of 82,000.  JLL has over 50 years of experience in Asia Pacific, with over 37,000 employees operating in 96 offices in 16 countries across the region. We were the first global commercial property firm to establish an Australian presence in 1958 and currently employ over 3000 employees throughout our 18 offices across the country.