Australia Commerical Real Estate

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US investment giant Franklin Templeton tips declining capitalisation
THE AUSTRALIAN OCTOBER 17, 2014 12:00AM

Sarah Danckert

Property Reporter
Melbourne
AMERICA’S $US1 trillion ($1.14 trillion) investment house Franklin Templeton expects capitalisation rates in Australia to continue to tighten despite concerns that demand from tenants in the retail and ­office sectors will remain weak.

The outlook, delivered yesterday by the powerhouse’s head of real estate, Jack Foster, at the Atchinson Global Property Forum in Melbourne, comes as rental growth continues to lag behind the growth in property values. “I don’t think the demand for Australian real estate is going to pull back and I think we’ll see cap rates longer term trending down from here, even though it’s unprecedented,” Mr Foster said.

“You’ve got the vastest superannuation scheme in world and you’re thinking about increasing that. You’ve also got global demand that’s not going to go away — it’s just a fact of life.”

Mr Foster pointed to capitalisation rates in London offices that were already running at between 2 per cent and 3 per cent, noting that while Australia’s cap rates on office property were not anywhere near that rate — they are between about 5.5 per cent and 6.5 per cent for super prime assets — Australian rates would fall over time. Mr Foster, a legend in real estate circles, also said super funds and sovereign wealth funds were increasingly pushing for fees paid to their investment managers to be tied to revenue rather than net asset values to ensure managers were not plumping values to earn fees.

While much of Franklin Templeton’s real estate holdings are through real estate investment trusts around the world, Mr Foster said the group was preparing to invest in direct property.

“Franklin Templeton is going to go into direct real estate in a big way,” Mr Foster said.

Australia’s Goodman Group has significant exposure to ­Europe, while Westfield has a ­development in Milan and is also looking to expand into France and other continental European ­countries. “As we move into a ­European environment which looks like it might even include deflation, it’s going to be hard for even high-quality companies to raise rents in that environment,” Mr Foster said.

Also speaking at the event was CBRE senior director Asia-Pacific capital markets John Wills who, responding to a question from ISPT chief executive Daryl Browning about low economic growth, said lacklustre rents and incentives were an issue.

“I’m really concerned about that. Where will the growth come from? Our economy is at a really interesting stage. Especially as it relates to office buildings. I’m very concerned,” Mr Wills said.

He added that demand from China for secondary stock, especially in Sydney, would help to buoy the office market for some time yet.

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Sydney, Melbourne among the top for foreign investors

282 words
18 Oct 2014
The Australian Financial Review
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English
Copyright 2014. Fairfax Media Management Pty Limited.

Sydney is the fourth most popular destination in the world for foreign investors in commercial property – behind London, New York and Paris. And Melbourne is close behind.

At least they were the rankings in 2013-14 according to a report from global real estate group Cushman & Wakefield – Winning in Growth Cities.

Global commercial property investment rose 17 per cent in the year to June, to $US788 billion ($900 billion), and cross-border investment, not counting the purchase of development sites, soared even more, by 39 per cent.

Australian office towers, shopping centres and industrial facilities, attracted more than a fair share.

Global investors are attracted to the country by the generally higher yields on offer; the relatively strong level of property rights and transparency; and, despite the local despondency about the economy, a positive outlook for population and medium term economic growth in cities such as Sydney and Melbourne.

Brisbane is also on the global radar, at number 19 for cross border buying, behind Berlin but ahead of Hong Kong.

Investment out of Asia from China, Singapore, Hong Kong and Japan, surged 56 per cent during the year.

But the largest share of global cross border investment, over $US75 billion, still comes from the US and Canada.

The big change for 2015 will be a shift of focus to second tier cities and secondary property wrote Cushman.

Its head of Asia Pacific capital markets, John Stinson, said because of the relatively low growth expected in Asia in the next five years, large Asian funds and investors were re-weighting to emerging cities, or increasing allocation to the US and Europe.

Robert Harley


Fairfax Media Management Pty Limited

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Commercial property sector looking up
THE AUSTRALIAN OCTOBER 30, 2014 12:00AM

Kylar Loussikian

Journalist
Sydney
NAB’s commercial property index
NAB’s commercial property index Source: TheAustralian
SENTIMENT in the commercial property sector is looking up, with the latest National Australia Bank survey recording its first overall positive result since early 2011.

The outlook for retail has finally hit positive territory after a four-year slump while sentiment in the office market continued to improve, although it remained negative. Confidence in the CBD hotel market remains strong.

The NAB survey, conducted over the three months ending in September, forecasts a big lift in sentiment over the next 12 months, with capital values expected to rise and a “big increase in numbers (of developers) planning to start new work in the short term”.

The construction pipeline is dominated by residential work, according to the survey, as more developers look at acquiring land after stocks hit their lowest level since mid-2010.

But sentiment varied by state, with Western Australia hitting an all-time low, and the outlook deteriorating as the gap between it and other states widens.

Alan Oster, NAB’s chief economist, put the weak sentiment in Western Australia down to “large falls in capital values and rents” as downsizing continued in the resources and resources-related sectors.

The overwhelming majority of the 300 respondents reported rental expectations were improving, beginning to inch up in the next year.

“Average rents continued to fall in all markets, but at slower rates, as leasing incentives and vacancy rates climbed, especially in the national office market,” Mr Oster said.

Respondents included real estate agents, property managers, fund managers, property developers and valuers.

The most pressing concern remained the availability of suitable stock, although government red tape and regulation fell as a worry.

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Office market set for slow recovery as economic growth remains weak
THE AUSTRALIAN OCTOBER 30, 2014 12:00AM

THE blowout in office vacancies, pretty much throughout Australia, is more about the weakness of demand than the strength of supply. Supply has been subdued for a while now, albeit with differences between states. But tenant demand has been even weaker.

The fall in the net absorption of office space in most capital cities is fully explained by the drop in underlying demand. It’s not about changing work practices such as Activity Based Work (hot desking) reducing space requirements. This is about the weakness of domestic economic growth and office employment.

We forecast the demand for office space by plotting employment by industry and working out how much office space that requires. The underlying demand is the amount of additional space required to cater for the growth in the number of office workers based in dedicated office buildings.

We know, industry by industry, the proportion employed in offices. And we know the proportion that work in dedicated office buildings. We call that the stand-alone office workforce. Hence underlying demand.

The good news is that demand has picked up over the last six months. Nothing spectacular, but a solid recovery and a turning point on which to build growth.

The bad news is that domestic demand will remain soft until non-mining business investment and a recovery in the trade-exposed industries boost growth. But that’s still about two years away.

How did it get this bad?

It’s not about mining. Mining investment has hardly begun to fall. While there have been some anticipatory cuts, the real impact will be over the next four years when we expect mining investment to fall by 40 per cent.

The problem is that, approaching this transition, non-mining sectors remain weak, still in cost-cutting mode since the global financial crisis. And non-mining investment remains weak, affecting those sectors servicing investment.

Worst hit has been business services where gross value added fell by 4 per cent last year. This sector has been the mainstay of the Australian economy, with consistent above average growth. Demand hadn’t fallen in over 20 years.

The current weakness drove yet another round of staff cuts. Employment fell sharply last calendar year, more in Sydney than Melbourne. And this is the major office-using sector, constituting more than a quarter of office demand. The good news is that employment has picked up over last six months, heralding the beginning of what will be a moderate rather than spectacular recovery.

Of the other major office-using sectors, employment in the finance, telecoms, manufacturing and wholesale trade sectors have been soft for two years.

Public admin is experiencing fluctuations associated with budget cuts by federal and state governments superimposed on a rising trend. Only health and construction have remained strong. Hence the weakness of office employment and underlying demand for office space. Now office demand has turned, but only just. There will be swings and roundabouts.

Demand will recover, in particular as non-mining investment comes through, boosting the demand for investment-related services and benefiting Sydney and Melbourne in particular.

Further, a lower dollar will help the competitiveness of the trade-exposed sectors, notably agriculture, mining, manufacturing, tourism, education, finance and business services — probably services first. But the dollar will take time to come down sufficiently.

The offset will be a decline in mining investment-related services. That has already begun as the mining companies cut costs and work on future investment. But the major impact has yet to be felt. And that will hit Brisbane first, then Perth and later Darwin. Before the mining boom, Brisbane, for example, was a branch office town. The question is whether some of the services built up during the boom will stick. We expect a dampener on demand at the least.

This is an extraordinary time for office markets. Structural change and investment cycles in the economy will drive fluctuations in demand. The office cycles are out of sync, with significant differences in the strength of recovery in demand. The only growth markets are Sydney and Melbourne. The rest are overvalued, facing significant periods of oversupply, falling rents and prices, and poor returns.

Even in Sydney and Melbourne, it won’t be a quick rebound. It will be a slow build of momentum through the remainder of the decade. And this is our window to get set.

Frank Gelber is chief economist for BIS Shrapnel.

fgelber@bis.com.au

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Steinberg and Steinert slap down RBA over talk of market ‘bubble’
THE AUSTRALIAN NOVEMBER 01, 2014 12:00AM

Sarah Danckert

Property Reporter
Melbourne

TWO of Australia’s top property executives — Dexus chief executive Darren Steinberg and Stockland chief Mark Steinert — have popped the Reserve Bank of Australia’s commercial property thought bubble, slapping down the central bank for raising concerns about the market.

The comments from Mr Steinert and Mr Steinberg come just weeks after the RBA released its financial stability review for the September half-year.

In that report, the RBA warned: “One risk facing the commercial property sector is that a reversal in the strong growth in ­investor demand might expose the market to a sharp repricing.

“In particular, inflows of foreign capital could slow or cease once global interest rates start to rise.”

At a Property Council of Australia lunchtime event in Melbourne yesterday, Mr Steinberg brushed away the concerns.

“I think the jawbone from the Reserve Bank the other day was exactly that. If you want to say that globally there is a bubble in commercial property, let’s have that debate,” Mr Steinberg said.

He said capital was allocated to where the best opportunities were around the globe. “If you’re a global pension fund or an Australian fund and you want to invest in an office property in New York, you’ll be buying it on a yield on 4.5 per cent if you’re lucky,” he said.

“London is 4.5 per cent. Tokyo a bit less, around 3.5 per cent, and Singapore and Hong Kong around the same levels. That is why the capital is being allocated to Australia.

“So there’s a whole question about who is the logical holder of this core real estate — is it pension funds or is it listed real estate funds?”

When asked after the luncheon if there was a property bubble, Mr Steinert replied firmly: “No. I’m not sure why the RBA said that.

“There certainly isn’t a commercial property bubble.

“There isn’t an oversupply of commercial property and yields in Australia are much higher than in other countries.”

He said land in Australia’s top cities was still a lot cheaper than in other major cities in the world, ­citing Tokyo as an example.

The two chief executives were also asked about consolidation in the industry.

The questions came in the wake of a report in The Australian this week that Dexus and GPT Group had held merger talks about two years ago, but that the talks had been aborted.

“There are a lot of IPOs coming through and smaller vehicles,” Mr Steinert said.

“And ultimately if some of those are not well managed or are over-levered then I would anticipate they would be taken over quite rapidly.”

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Investa Property Group raises $400m capital to fund major purchases
BEN WILMOT THE AUSTRALIAN NOVEMBER 06, 2014 12:00AM

INVESTA Property Group’s flagship wholesale property fund has raised about $400 million in fresh capital and flagged its interest in making purchases in major cities.

“We like Sydney and the city’s leasing conditions are continuing to improve,” Investa Commercial Property Fund manager Peter Menegazzo said, citing higher demand from small to medium enterprises, IT & T firms and mid-tier professional services groups.

ICPF this week settled on a $388.5m deal to buy a half stake in landmark Perth complex QV1 from the group’s balance sheet on a yield of 7.4 per cent.

The purchase of the landmark tower, in a prime location in Perth’s CBD, prompted a capital raising, which took advantage of strong demand from local and international institutions for top- quality Australian property. The raising was well supported by new and existing investors.

The move came after raisings by GPT Group’s flagship office and retail property funds, and AMP Capital seeking funds for its shopping centre fund and new diversified wholesale fund.

Lend Lease also recapitalised a $600m-plus retail property fund mid-year.

Mr Menegazzo said ICPF had been opportunistic in accessing high-quality properties, including in Perth, counter- cyclically. The fund now has interests in 14 premium and prime-grade buildings valued at nearly $3 billion and the Perth play was partly about diversifying the fund into new markets. In July, ICPF also picked up a half stake in 201 Kent Street, Sydney, for $173m, giving it full ownership of the tower.

Ahead of the Perth and Sydney purchases, the fund had bought more than $485m of assets in the 2014 financial year. Mr Menegazzo expects further yield compression on office assets and he cited the recent $1bn-plus CBUS Property portfolio sale in Melbourne as an example of yields tightening.

Investa runs ICPF as a total return fund, giving it the capacity to take leasing risk on towers it owns in Sydney and Brisbane.

“The fundaments are in place as these are quality assets in core locations. Now we intend to lease up and the add value,” Mr Menegazzo said.

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Suburban office sales reap $100m for Bennelong Property Group
THE AUSTRALIAN NOVEMBER 06, 2014 12:00AM

Kylar Loussikian

Journalist
Sydney
BENNELONG Property Group has sold three suburban office properties in Melbourne, reaping near $100 million.

It is believed the most significant property, at 2 Luton Lane in Hawthorn, has sold for about $35m, which would reflect about $6000 a square metre.

Two other buildings, at 293 Camberwell Road in Camberwell, and 290 Burwood Road in Hawthorn, have sold for about $40m and $24m respectively.

The four-storey Camberwell property, anchored by three tenants on a weighted average lease expiry of 4.3 years, has a total net income of $2.98m, while the four-floor Hawthorn property is fully leased with an income of $1.81m a year.

The three-storey Hawthorn property is leased to the listed Skilled Group on a 10-year lease, bringing in $2.53m annually.

The sale was handled by CBRE’s Justin Clarkson, Mark Granter and Jamus Campbell together with Colliers International’s Peter Bremner and Rob Joyes, with the buildings offered as a portfolio or individually.

It is understood the buildings sold individually, with two bought by local investors — including an owner-occupier taking the Burwood Road property for partial use. One sold to an ­offshore buyer.

Suburban offices in Melbourne have been in demand this year, with 28 transactions worth about $790m in the six months to September, according to Colliers International. The vast majority, about $518m, were made by institutional investors.

Bennelong held the properties for about 12 years, since it ­established its funds business.

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Sydney tower market proves 'red hot'

Larry Schlesinger
509 words
6 Nov 2014
The Australian Financial Review
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English
Copyright 2014. Fairfax Media Management Pty Limited.

Investment in CBD office towers is on course for its highest level since the 2008 global financial crisis, according to the LJ Hooker Office Market Monitor.

Over the first nine months of the year, LJ Hooker Commercial recorded $13.5 billion of assets changing hands, more than the total for the whole of 2013, with the next three months looking buoyant.

"Investment markets are running strongly, with keen interest from both domestic and overseas investors," said LJ Hooker national research manager Matthew Tiller.

"This is particularly the case for core assets (well-leased, prime CBD buildings with long weighted lease expiries) in Sydney and Melbourne.

"However, recently institutional investor interest has also strengthened for suburban office properties across all metropolitan markets. This strength has continued to see prime investment yields tighten and values rise," Mr Tiller said.Sydney and Melbourne show the way

The report highlighted the now established trend of a divergence between yields – tightening below seven per cent in Melbourne and Sydney – and the weaker leasing market, where incentives are at 30 per cent in Melbourne and Sydney, 32 per cent in Brisbane and 24 per cent in Perth.

However, the report said that across the country, leasing markets were slowly moving through the recovery cycle, led by rising tenant demand in Sydney and Melbourne with leasing incentives starting to stabilise. "Overall, face rents are nudging higher but not sufficiently to offset the rise in leasing incentives," Mr Tiller said.

In Sydney, LJ Hooker reported there were positive signs of recovery with vacancy rates declining within most regions and leasing activity beginning to strengthen. The vacancy rate was forecast to remain between 8 per cent and 9 per cent until 2016, before falling to 5 per cent by December 2017 due to a lull in office completions. On the investment side, LJ Hooker said the Sydney office market was "red hot" with average prime capital values rising to $11,000 per square metre and "driven by demand for assets across all price points and grades".Residential conversion's drawcard

"Office assets with development upside have received the strongest interest with those ripe for residential conversion most in demand," Mr Tiller said.

In Melbourne, LJ Hooker expected investment sales to match or exceed 2013, with growing appetite for smaller office properties with the potential for conversion to residential use.

However, the addition of new office supply would push up vacancy rates closer to 10 per cent by 2015, with leasing incentives remaining high and rents softer for the next 12 to 18 months.

Afterwards, the leasing market should strengthen, with the vacancy rate falling to 8 per cent by mid-2017.

In Brisbane, investment activity has pushed down premium grade yields by 20 basis points to 6.8 per cent. However, the CBD market has suffered from a loss of tenants to fringe markets.

In Perth, investment has slowed due to a lack of stock, while leasing conditions have worsened with incentives doubling in the space of a year.


Fairfax Media Management Pty Limited

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Investors buoyant

Michael Bleby
208 words
6 Nov 2014
The Australian Financial Review
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English
Copyright 2014. Fairfax Media Management Pty Limited.

Australian property investors are the most confident in the world, with more than 83 per cent planning to increase their investments over the next 12 months, according to the latest Colliers International global survey.

Strong economic growth and improving global conditions are driving sentiment higher – up from 72 per cent last year – and putting Australian and New Zealand investors ahead of their counterparts in any other region, the agency's International Global Investor Sentiment Survey shows.

While year-to-date investment volumes in Australia were up on the same time last year, with $19.8 billion transacted across all asset classes compared with $17.7 billion in 2013, a lack of suitable stock was pushing investors to behave differently from the past.

"We are ... seeing more investors moving in secondary office markets and showing greater interest in industrial," said John Marasco, Colliers International managing director of capital markets & investment services. "We are yet to see many Australian investors move offshore however we consider it likely in the next two years as competition for stock continues to intensify."

The spread between yields in prime and secondary CBD office assets that has grown since 2007 has also started narrowing, the report shows.

Michael Bleby


Fairfax Media Management Pty Limited

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Industrial sector still a sound investment: Harrison

Luke Malpass
276 words
13 Nov 2014
The Australian Financial Review
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English
Copyright 2014. Fairfax Media Management Pty Limited.

In a cheap debt and low bond yield world, long-term industrial property will continue to be a solid investment compared with other asset classes, Charter Hall co-managing director David Harrison says.

Compared with bond yields and ­current volatility in equity markets in Australia and abroad, investors will still be looking for high-quality investment grade industrial property in particular, Mr Harrison said.

Property would continue to thrive "giving you 7 to 8 per cent income ­distribution, because yields are still at high relative levels compared to bond yields and low cost of debt", Mr ­Harrison said. He also pointed to Australia's limited and diminishing pool of available long- term investment grade assets, ­estimating that Charter Hall's ­development arm, CIP, was responsible for a "10 per cent share of total ­pre-leased products available to ­institutional investors", which puts the company in a sold position.

The fund, which has a market ­cap of more than $1.6 billion, delivered a full-year dividend of 22.3¢ to shareholders for the year ended in June.

Shareholders elected David Clarke as its new chairman at the annual meeting in Sydney on Thursday, replacing chairman of 10 years Kerry Roxburgh.

Board members Peter Kahan and David Harrison, were also re-elected. Unusually, Mr Harrison was elected without a single vote being cast against him.

New chairman David Clarke praised Mr Roxburgh, crediting him with firm leadership ­during the global financial crisis. Mr Roxburgh was more sanguine, joking that "it's a bit like Gough ­Whitlam. They say nice things about you – but it's all reconstruction".


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