It appears that foreign investors are not only active in Sydney’s residential property market — they’re also busy buying up commercial assets.
According to a report from Bloomberg “foreigners are plowing record sums into the city’s office market, lured by higher yields than elsewhere, and now own almost one in every five downtown buildings”.
The report says sovereign wealth funds from the United Arab Emirates and China are currently competing against the likes of Blackstone, Brookfield Asset management and South Africa’s Redefine Properties to purchase Investa Property Group’s $9 billion portfolio of Australian commercial assets.
According to David Rees, head of research for Australia at JLL, the amount of foreign investment across Sydney’s CBD is growing rapidly.
“Foreign entities now hold 19 percent of office space in Sydney’s central business district, up from 15 percent five years ago, said Adam Woodward, national director for capital markets at Colliers International. Across Australia, foreign investors accounted for 25 percent of all office transactions in the last five years and bought a net A$4.5 billion in office property in 2014.
They tend to be more prominent in the big trophy assets. They are willing to pay more than Australian investors are willing to pay.”
Mirroring their increased involvement in Australia’s residential property market, Chinese investors accounted for 25% of all outbound foreign investment in the March quarter of 2015, according to Sydney Commercial Real Estate (CBRE) group.
The increased involvement of foreign investors in Australian commercial property assets comes at a time where Australia’s central bank, the RBA, is warning that risks across the sector are increasing.
Here’s the RBA from its financial stability review released in March.
“In recent years, commercial property conditions have softened significantly and there are now clear signs of an emerging oversupply in some markets. In CBD office markets, vacancy rates are high and generally increasing, rents are flat or falling, and leasing firms are offering sizeable incentives to secure tenants.
On the supply side, a significant amount of new office space is still expected to come online in Brisbane and Perth in the next couple of years due to earlier investment decisions. As a result, market commentators expect vacancy rates in these cities to rise further. Consistent with this weak outlook, building approvals for offices have fallen over the past year, and industry liaison suggests that some new projects are being delayed or shelved ahead of construction, due to difficulties in acquiring a sufficient level of tenant pre-commitments. Leasing conditions in industrial and retail property markets also appear subdued nationwide, with rents flat or falling.
Despite this weakness in leasing conditions, commercial property prices have continued to rise at a national level, driven in particular by investors’ search for yield in the global environment of low interest rates and ample liquidity, with the lower Australian dollar also likely to be adding some impetus to foreign demand. As a consequence, the total value of office, industrial and retail property transactions has risen sharply recently, with a notable increase in the share of transactions involving foreign purchasers, particularly in Sydney”.
As a result of weak demand, oversupply in some markets and the recent sharp increase in commercial property values, the RBA suggested that “the risk of a large repricing and associated market dislocation in the commercial property sector has increased. This could be triggered by several factors, such as growing excess supply that prompts a reassessment of valuations, or a sharp fall in foreign investor demand, perhaps due to a rise in global interest rates or weaker conditions in foreign investors’ home countries”.
With the US Federal Reserve on the cusp of normalising interest rates in the months ahead, foreign investment in Australian commercial property assets continuing to grow and prices continuing to push higher, perhaps the risks outlined by the RBA in March are even more pronounced today.
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