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Australia: Another Hot Asian Economy

The Australian economy is booming, and it's creating a ripple effect across the globe –Australian money is devouring commercial real estate assets in the United States, Europe and Asia, while global real estate investors are looking to take advantage of the country's growing wealth. 

"Australia is in the middle of the Asian growth boom, which means that we're just at the beginning of a capital tsunami," says Kurt Wright, CEO of Quadrant Real Estate Advisors, an Atlanta-based firm that has $2.5 billion in Australian money under management.

Australia's resources sector is driving the growth, exporting coal and iron to the emerging markets in Asia, particularly China. The country posted GDP growth of more than 6% in 2006—the biggest gain in seven years.

"This resources boom strongly benefits our local economies and property sectors through a greater take-up of space, rental growth and reduced vacancies," says Stephen Kovacs, associate director of investment sales for Colliers International in Sydney.

Meanwhile, unemployment has dropped to its lowest rate in 31 years, and the stock market recently hit a record high, pushing household wealth to previously unseen levels. That means that assets in the country's superannuation funds—Australia’s state-regulated pension system, which is funded by employers and employees—are soaring. 

These funds are big investors in commercial real estate, both in their home country and across the globe. With $950 billion under management, they allocate at least 9% to real estate. Some funds have even higher allocations in commercial real estate: ARIA, the $17 billion super fund for Australian Government employees, has a 15% strategic asset allocation to real estate. Its fund manager, Arcadia Funds Management Ltd. recently purchased a 92% interest in 1 Chifley Square in Sydney’s CBD for $84.5 million.

Fighting the locals
Australian funds and listed property trusts continue to dominate the Australian investment market. During the first half of 2006, outside capital accounted for only 11% of total transactions, according to Jones Lang LaSalle. During that period, roughly $4.8 billion of real estate changed hands, an increase of 7% over the first half of 2005.

Indeed, Australia can be challenging for foreigners, because of the high demand for property and the sophistication of local players—many of which are competing on a global basis. "We have seen a number of offshore investors come to our market in pursuit of deals, but few have successfully acquired assets in our market or been able to compete with the strong domestic demand," says John Talbot, head of capital markets for Jones Lang LaSalle in Australia. He estimates that there is $5 of capital for every $1 of product on the market.

GE Real Estate is one of the few non-Australian investors that have been able to put money out. In 2006, the firm invested more than $1.2 billion, representing about 10 percent of the investment market, says Roger Keane, managing director of Australia/NZ, India and Southeast Asia for GE Real Estate.

Most recently, GE Real Estate purchased four Class A office properties, known as the Cape Bouvard portfolio, for roughly $450 million. Located in the Perth, Melbourne and Sydney CBDs, the properties also include ground-floor retail and parking structures. 

Several German funds have made significant investments in Australian real estate, too. German pension fund, Real I.S., for example, recently purchased the Geoscience complex in Canberra for $183 million. It also bought office towers in Melbourne and Adelaide in 2006.

Retail assets, regional malls in particular, continue to be the favored asset class in Australia. "Retail is a very constrained asset class," Talbot explains. "Strong town planning regulations in most cities effectively constrain the amount of new supply entering the market."

As the GE and Real I.S. deals indicate, office properties are back in favor after several years out of the spotlight. That’s due to “positive rental growth outlook in all markets over the next two to three years with demand forecast to continue and supply in the short-term to be limited before the next round of developments are completed in 2009 to 2010," Kovacs says.

Yields are in line with those in the U.S. Prime office yields range from 5.75% to 7%, while retail yields range from 5.5% to 6%, and industrial yields range from 7%t to 8%, Talbot says. He estimates that property yields have compressed by 100 to 200 basis points in the past 12 months.

"We don't think Australia is any more risky than any of the major overseas markets and in some ways is possibly less so, as all Australian cities have fairly stringent planning guidelines which help with stability and control of new supply," Keane says. "In particular, some of the larger office markets such as Sydney and Brisbane are geographically constrained, so it is not like some overseas markets where if the market is hot you can just go and build a whole new CBD."

Within Australia, Sydney and Melbourne continue to be the most sought after investment locales, but Perth and Brisbane are benefiting from the global resources boom and attracting investors; researchers predict 20% rental growth for both markets in the next 12 months.

Investors looking for stable cash flow and little risk find Australia an ideal investment market. "Australia is attractive because the market is liquid, the political system is stable and the track record of returns is good," explains Richard Bowman, a partner with Ernst & Young in Australia. "Over the long tern the total capital returns are commensurate with equities."

However, Aussie investors who seek higher returns or those who require certain kinds of property for diversification purposes invest the a significant amount of capital outside of Australia, says David Rees, director research with Mirvac, one of the largest listed property trusts in Australia.

"Many Australians feel that property values here are fully realized – they feel that yields have compressed about as far as they're comfortable with," Rees says. Moreover, he points out some property sectors – like multifamily – aren't available for investment in Australia. "There are some diversification arguments for going outside the country," he says. 

Bowman suggests that Australia investors have conquered their local markets and are now looking for bigger challenges. "We have an excellent and mature market which has allowed us to generate intellectual capital, and we are now using that to go global," he explains. "Look out the Aussies are taking over."