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Aussies at the Gate

Editor's note: This story about Australian investment across the globe is the second in of a two-part series about Australia's booming economy. The first part of the story covered real estate investment in Australia. 

When it comes to real estate, Australian investors are like teenage boys – they're always hungry and they take big bites.

Consider Centro Properties Group's acquisition of New Plan Excel Realty Trust Inc. – the $6.2 billion deal is Centro's third agreement with a U.S. REIT. Together, the first two – Kramont Realty Trust and Heritage Property Trust – totaled more than $3 billion.

"The increasing appetite of Australian investors for quality retail properties for their growing superannuation [retirement] savings has led Centro to continue to seek quality and appropriate retail assets," said Centro Chairman Brian Healey. With the New Plan acquisition, Centro will have 679 centers totaling 105 million square feet under management.

Centro is just one of many Australian investors that are looking for opportunities outside of their home country. With such stiff competition for deals in Australia from domestic investors and increasingly successful foreign bidders, many Australian funds are emphasizing global expansion.

"With the weight of funds looking to buy property [in Australia] and the lack of quality stock available, it is likely that the trend of overseas investment by Australians is only going to increase," says Roger Keane, managing director of Australia/NZ, India and Southeast Asia for GE Real Estate. 

Australian property investors spent more than $10 billion in the U.S. and Europe in 2006, according to Jones Lang LaSalle. The bulk of Australian money ended up in Europe ($6.65 billion vs. $3.78 billion in U.S.). "The focus at the moment is Europe more than the U.S. where yields have firmed quite significantly in the last 12 months," says John Talbot, head of capital markets for Jones Lang LaSalle in Australia. 

From 2002 to 2005, however, Australians were hot for U.S. assets, spending $7.7 billion in 2005 alone, according to Real Capital Analytics.

"The U.S. is the most attractive in terms of familiarity and homogenous property law," says David Rees, director of research with Mirvac, one of the largest listed property trusts in Australia. "It's a lot harder to get our brain around property law in Europe and Asia, but it's getting kind of expensive for Australian investors to come to the U.S., so there's a bit of a tilt towards Europe."

Euro-Asian flavor

Australians were particularly active in Germany where they purchased around $1 billion worth of assets in the first half of 2006. For example, Record Realty bought a portfolio of seven offices in Germany leased to Deutsche Telekom for a combined price of $409.8 million.

Terra Capital Partners, a New York City-based real estate investment management firm with offices in Singapore and Sydney, plans to open an office in Düsseldorf, Germany, to take advantage of European investment opportunities. The firm started raising capital from Australian investors in 2003 and since then has invested more than $1.5 billion of Australian capital in U.S. real estate with a value of $3 billion.

"We've been investing solely in the U.S.," says Terra Capital Partners' president Bruce Batkin. For example, the firm recently invested $20 million in a residential conversion in Brooklyn and financed an office development project in Chicago, producing return on equity in the mid-teens, Batkin says.

However, Terra Capital's Australian investors are clamoring for non-U.S. opportunities. "We expect to start investing in European real estate for diversification and for the growth opportunities that we see, especially in Germany," Batkin says.

Macquarie is one Australian investor that is increasingly interested in investing in Europe, says Mark Baile, head of real estate Europe & North America. In fact, he moved from Chicago to London to look for opportunities. "We expect Europe to be a much higher proportion of our overall investment than it has been," he says.

Baile notes that Macquarie sees the biggest opportunities with Europe's emerging REIT markets. "Our focus will be on the creation of REITs," he explains, pointing out that Macquarie manages a number of Listed Property Trusts (LPTs are the Australian version of a REIT) and hopes to do the same in Europe.

Currently, Macquarie is searching for investment-quality assets to acquire and put into a REIT structure and is using its own balance sheet to build a portfolio. "We used joint ventures to build our presence in the U.S., and we have been able to bring $11 billion of assets under management through JVs with ProLogis, Regency Centers and Developers Diversified," Baile says. "In Europe, we can't do those kinds of JVs because companies just don't have enough scale."

Within Europe, Macquarie is looking for opportunities in non-traditional real estate sectors like self-storage, parking and healthcare. "The alternative real estate sectors in the U.S. are more mature than they are in Europe and that's why we see the alternative sectors as more opportunistic," he explains. For example, Macquarie invested £35 million for self-storage assets in the United Kingdom.

Also, Aussie investors are focusing more on Asia Pacific real estate. "Even though Asia seems like it's our backyard, it still gets a relatively small portion of our investment,” Rees says. “But, now investors are going to Japan and Hong Kong," he explains.

Hong Kong has been the main destination for Australian investors, accounting for 12% of the foreign investment there, according to Jones Lang LaSalle. 

Still the one

Australian investors still have an affinity for the U.S. market. According to the most recent survey from the Association of Foreign Investors in Real Estate, 54 percent of its members predicted that Australians would be the most active foreign investors in U.S. commercial property in 2007.

"Europe was seen as the next frontier, but it certainly hasn't accelerated as rapidly as everyone might have thought," Baile says. "Even though cap rates have come down in the U.S., the population and economic growth still support investment there."

Now that Australians are comfortable with U.S. real estate, the next step is introducing them to debt products, says Kurt Wright, CEO of Quadrant Real Estate Advisors, an Atlanta-based firm that has $2.5 billion in Australian money under management.

"We've seen growing interest from Australian superannuation plans in mezzanine debt and commercial mortgage backed securities," Wright notes. "Three or four years ago, they really didn’t have much interest. Now there's definitely some curiosity, and I think Australian investment will move that direction."

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