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- OPINION
- Sep 23 2015 at 7:19 PM
- Updated Sep 23 2015 at 8:03 PM
The peak of the cycle is near
NaN of
[img=620x0]http://www.afr.com/content/dam/images/g/j/8/q/o/f/image.related.afrArticleLead.620x350.gjsvwb.png/1443002637930.jpg[/img]Chief executive of Cromwell Property Group Paul Weightman, has warned about market pricing. Chris Hyde
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by Robert Harley
The wave of commercial real estate offerings in the next eight weeks will come close to marking the peak of the current cycle.
The commentary from the Real Estate Investment Trusts reports was clear. All managers expect further yield compression and still more increases in values.
They have been justified as the Chinese sovereign fund CIC bought the $2.5 billion Investa Office portfolio and then as Singapore group Ascendas paid more than $1 billion for one of the best logistics portfolios in Australia. Both deals set prices and yields not seen in this cycle.
But a growing band of REIT managers, including Paul Weightman at Cromwell Property Group, Frank Wolf at Abacus Property Group, Tony Pitt at 360 Capital and Greg Goodman at the Goodman Group, said it was time for caution.
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As Pitt said at his annual meeting this week, its time to focus on the property fundamentals.
The executives marketing the wave of offerings dismiss the concerns.
"There is certainly depth of demand for premium grade assets," says John Marasco, the managing director of Investment Sales at Colliers International.
He points to record low interest rates, the falling dollar and the free trade agreements with China, Japan and South Korea as "significant factors" in the current market.
"This is my third cycle," he says. "Previous cycles were heavily weighted to debt. This time is completely different. What is driving the market is equity."
JLL's head of office investments, Rob Sewell also points back to previous cycles when in 1989 Sumitomo bought a Sydney office tower on a yield of 4.3 per cent.
"We certainly have not got to 1989 levels," he says. "Back then interest rates were much higher."
In a new report, JLL note the record level of offshore investment in Australian commercial property with 27 per cent of major sales in the past year going to offshore buyers, and not just Chinese.
For many that is a reminder of the end-of-cycle foreign entrants who boosted prices ahead of the collapses of the 1970s and 1990s.
Not for Sewell. "What we are seeing is different style of offshore buyer," he says. And the global gorillas, the Norwegian and Japanese sovereign funds and the Chinese life offices are yet to arrive.
Nevertheless Australian property investors have felt the global pain. In six months the ASX 200 REIT index, traditionally a pointer to underlying property prices, has lost 9.5 per cent of value.
On Monday, the bidding for 25 investment offerings at the Burgess Rawson auction in Sydney, was far more subdued than in recent months.
rharley@afr.com.au
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Offshore buyers of commercial real estate set September quarter record
NaN of
[img=620x0]http://www.afr.com/content/dam/images/g/i/c/r/s/b/image.related.afrArticleLead.620x350.gjz3v0.png/1443691533759.jpg[/img]The portfolio includes 120 Collins Street in Melbourne. Gabriele Charotte
by Mercedes Ruehl
Offshore buyers bought 56 per cent of Australian offices towers, shopping malls and logistics assets over the September quarter, the highest proportion on record.
Foreign investors, especially Chinese capital, dominated sales activity during the three months to the end of September, the highest number recorded in the 10 years of record keeping by global real estate group CBRE.
"Given the current level of transaction activity, we are on pace to reach the record $29.6 billion in annual sales recorded during 2014," Mr McNabb said.
"The major source of new capital has been China, with Australia attracting close to 25 per cent of the $US6.5 billion ($91.7 billion) in Chinese investment capital released into global real estate markets in the first half of this year."
For the quarter there was an 8.5 per cent jump in overseas purchases compared with the same period in 2014.
Major purchases such as the $2.5 billion acquisition of the Investa balance sheet portfolio by the China Investment Corporation did skew the data. Singapore's Ascendas was also another significant buyer during the period with its purchase of the GIC/Frasers Australand portfolio for more than $1 billion.
The surge in Chinese capital is now being propelled by the larger insurance groups, said CBRE's executive managing director, capital markets, Mark Granter.
"As expected, we are starting to see the larger Chinese life insurers target opportunities here as they look at geographic diversification to balance their investment portfolios," Mr Granter said.
"These investors are targeting major gateway cities, with Sydney and Melbourne being high on the radar alongside destinations such as New York, London and Singapore."
While office transactions have been the biggest sector in terms of transactions, at $11 billion so far this quarter, that is still down 0.5 per cent on 2014 over the same period. But the retail and industrial sectors have picked up the slack, with retail transactions rising 18 per cent on last year (for the nine months to September) and industrial sales growing 5.4 per cent.
CBRE analysis takes into account sales of retail industrial and office property valued at over $5 million.
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Germany’s Commerz Real snaps up Sydney tower for $150m
Ben Wilmot
[Image: ben_wilmot.png]
Commercial Property Editor
Sydney
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Commerz Real has bought the AFP headquarters at 110 Goulburn Street, Sydney for $150m.Source: ThinkStock
[b]German investors are ramping up their presence in Australia’s property market with Commerzbank’s property unit joining several of its compatriots with a deal to buy a Sydney tower for about $150 million.[/b]
Commerz Real yesterday unveiled its purchase of the purpose-built headquarters of Australian Federal Police at 110 Goulburn Street, in the city’s central business district, from the private Kinder Investments. The off-market deal, brokered by CBRE, with Eureka Funds Management advising Commerz Real on fund structuring, comes amid a flurry of deals involving German capital.
Last month German investment house Union Investment Real Estate purchased a $120m tower in Sydney’s Clarence Street and it is also backing the acquisition of Flight Centre’s new $200m headquarters in Brisbane.
German fund Deka Immobilien Investment has been selling. It offloaded an Australian Taxation Office building in Perth to Warrington Property for $101m. Separately, it is selling Deka’s South Wharf office tower in Melbourne to CBRE Global Investors for more than $145m.
On the buy side, Deutsche Asset Management is in talks to buy FA Pidgeon & Son’s office tower in Adelaide Street in the Brisbane CBD for about $130m. German pension fund Bayerische Versorgungskammer also is backing LaSalle Investment Management’s purchase of an office tower in Melbourne’s Docklands.
Commerz Real used its open-ended real estate fund hausInvest to buy the 14,300sq m Sydney tower that has been tailored for police use. The building comprises 11 levels of office space spanning about 14,188sq m and may be considered for its conversion potential once the AFP’s long-term lease expires.
Commerz Real chief executive Andreas Muschter flagged more acquisitions in the Asia-Pacific area in the foreseeable future to develop a stronger market position. “We are taking a new path so as to develop additional international markets and utilise attractive investment opportunities,” he said.
“The Australian real estate market is one of the most transparent worldwide, with a positive development in rents and a comparatively good outlook for earnings,” said Robert Bambach, the board member of Commerz Real responsible for real estate transactions. “This acquisition in Sydney represents a sustainable contribution to the diversification of the fund portfolio.”
Commerz Real cited the tower’s attractive location, the high creditworthiness of the tenant and the potential for a lift in value resulting from the options offered by the lease contract, and the possibilities for expansion and use by third parties, such as law firms or consultants.
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This is part of the hot ind real estate segment that is bulking up with activities from private and listed segments...
Pitt’s 360 Capital closes in on ANI as trusts set to bulk up
Ben Wilmot
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Commercial Property Editor
Sydney
Greg Brown
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Property Reporter
Sydney
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360 Capital chief executive Tony Pitt. Source: News Corp Australia
[b]The $63 billion Australian real estate investment trust sector could see a renewed bout of consolidation as property fund managers look to bulk up their operations, with 360 Capital Group at the vanguard of those looking to grow their operations.[/b]
After almost a year of hostilities with rival industrial manager Fife Funds, the Tony Pitt-led group is closing in on the Australian Industrial REIT (ANI), which will be merged with 360 Capital’s industrial property fund to create a near $1 billion vehicle.
The independent directors of the management of ANI, Fife Funds, on Friday night advised shareholders to take Mr Pitt’s revised offer, which closes at 5pm today.
Winning enough of the register to complete the deal today will be a race against the clock for the 360 Capital Industrial Fund, which held 36 per cent of the register on Friday.
A takeover of ANI is one of a number of moves being eyed by Mr Pitt in a sign that his company is eyeing growth through acquisitions. 360 Capital, via its total return fund, last month emerged with an 8.24 per cent stake in business park specialist Industria REIT, which is also viewed as a potential target for predators.
Both 360 Capital and Industria manager APN Property Group have emphasised that the stake has been made for investment purposes. However, combining the trusts would enlarge Mr Pitt’s operation and also help mitigate the impact of tough difficult leasing conditions that Industria faces in Brisbane.
Any deal may need to be friendly as APN has just upped its interests to 15.55 per cent.
“With the future of major A-REITs — including Investa Office Fund and Westfield Corporation — on the local bourse uncertain, investors want to back vehicles that have sufficient scale,” one analyst said yesterday. “People are looking for trusts of size,” he said.
The shift to consolidation is seen as the next step after a wave of floats in recent years by operators including GDI Property Group and, Garda Capital Group.
Managers will seek to consolidate so they can grow their trusts and gain inclusion in major indices, cut debt costs and get on to the radar of more institutions.
The moves come as they face hot competition in direct markets from deep-pocketed offshore players for assets being sold by major groups, including Charter Hall and Mirvac, as well as tycoons such as Kevin Seymour.
Striking corporate deals can cut also stamp duty imposts and many funds can also boost earnings by acquiring assets.
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Office vacancy rates hold firm across metropolitan Australia
Kylar Loussikian
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Journalist
Sydney
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Sydney has the lowest rate of CBD office vacancies in Australia. Source: TheAustralian
[b]The office vacancy rate across Australia’s metropolitan centres remained unchanged at 12 per cent in the three months to the end of September, despite demand for space gathering momentum in the past year.[/b]
Figures released today by JLL show a continued decline in vacant office space in Sydney, down to 7.7 per cent and well below the 8.3 per cent two-decade average. Brisbane also recorded a compression in the vacancy rate to 14.5 per cent, the lowest level since mid-2013.
Despite the confidence across eastern seaboard capitals — Melbourne’s vacancy rate remained unchanged at 10.1 per cent — other markets deteriorated.
Perth’s office market recorded a negative absorption of 42,000sq m in the last year alone, pushing vacancies to 19.6 per cent, the highest level since 1995.
While demand for space had increased across most Australian capital cities, JLL’s head of strategic research Andrew Ballantyne said availability of backfill space from the relocation to new development stock resulted in an unchanged national vacancy rate.
“Sydney and Melbourne remain at the forefront of the leasing market recovery with leasing activity expiry-related in other CBD office markets,” he said.
“Nevertheless, there are tentative signs of organic growth in Brisbane, Canberra and Adelaide with positive net absorption recorded in each of those markets over the third quarter.”
The latest figures come as an office demand barometer — indicating sentiment for future office demand — released by Dexus Property Group recorded a minor fall of 0.4 per cent but remained in positive territory for September.
JLL’s head of office leasing, Tim O’Connor, said demand for space in Sydney was broadening away from the technology sector which had dominated the early phase of the recovery.
“A lower Australian dollar is positive for the externally focused services sector,” Mr O’Connor said. “The education sector is sensitive to foreign exchange rates and we have recorded increased activity from education-related users across the eastern seaboard.”
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Commercial property: Australia in top five for global investment
Turi Condon
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Property Editor
Sydney
[b]Australia ranked fifth in the world as a destination for global investment in commercial property as money flooded across borders racking up $US407 billion ($553bn) of deals worldwide in the first half of the year, according to agency CBRE.[/b]
It was the strongest first half since 2007, up 14 per cent over the prior corresponding period.
The US, Britain and Germany dominated accounting for $US301bn of commercial property investment, CBRE found.
The strong US dollar helped the Americas post a rise of 31 per cent, but affected Europe, the Middle East and Africa, which was up 5 per cent from the first half of 2014, while activity in the Asia-Pacific fell 19 per cent.
Australia was the exception with offshore investors underpinning $US10.3bn of sales.
CBRE’s Pacific executive managing director, capital markets, Mark Granter said Australia continued to attract a high share of cross-border investment activity, with Sydney ranked No 4 globally in this field. “The decline in the Australian dollar and the higher yields/returns in this market are continuing to attract offshore buyers,” Mr Granter said. “Given the current level of transaction activity in Australia, we are on pace to meet, if not exceed, the record $29.6bn in annual sales recorded during 2014.”
The influx of new sources of capital targeting real estate was helping to extend the investment cycle, said CBRE director Global Research director Iryna Pylypchuk. “This pushes the ‘old capital’ into niche sectors, prompting expansion of the investment universe.”
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Beware the risks in commercial property lending, Reserve Bank of Australia warns
NaN of
[img=620x0]http://www.afr.com/content/dam/images/g/g/v/m/k/p/image.related.afrArticleLead.620x350.gkazlr.png/1444975050660.jpg[/img]Building up to a fall? The risks of commercial property lending, particularly on residential developments, are growing just as the risk of oversupply is mounting, the RBA has warned. Daniel Munoz
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by Michael Bleby
The recent and sharp pick-up in lending to large-scale residential projects poses a risk to financial stability that banks will need to guard against, the Reserve Bank of Australia says.
Asian-owned local banks have led the charge, boosting lending for land and residential development for the past five years, while the major local banks only resumed strong lending recently, the central bank says in its Financial Stability Review.
The lending that has grown sharply is likely to continue in the near term, as growth in undrawn facilities – the difference between exposure limits and actual exposures to date – has also been large, indicating that more construction loans will be tapped just as the risks of oversupply are rising in some markets, the RBA said.
"Banks will need to remain vigilant in assessing the risks surrounding property development loans to ensure that this lending is prudent and appropriately covered by both capital and provisions," the central bank warned.
The RBA did not identify any banks by name.
RECORD HOUSING STARTS
Housing starts touched a record 212,000 in the year to June and approvals, a forward-looking indicator, reached a new record of 226415 in the year to August. Consultancy BIS Shrapnel predicts a net housing glut by 2018.
Lending on office and retail property has bounced back since local banks returned to the sectors in 2012 and the combined banks' exposure now exceeds their pre-global financial crisis peak, the RBA said.
Commercial property lending, which makes up about one-quarter of all outstanding business credit, has accounted for a further 40 per cent of the growth in business credit over the past two years, the RBA said.
In commercial property, too, the fastest growth – just under 20 per cent a year since 2012 – has come from Asian-owned local banks, which have funded foreign developers and invested "strongly" in existing commercial assets, the RBA said. In contrast, Australia's major commercial banks, which retreated from commercial property in the wake of the global financial crisis, have resumed lending and their exposure has risen by a more sedate 5 per cent a year since 2012, the RBA said.
But while demand for Australian office assets has pushed prices high a time of low global interest rates and ample liquidity, prices could fall if interest rates rose or global demand weakened, the RBA said. Falling prices were a bigger risk in Perth and Brisbane than Sydney and Melbourne, it said.
"Given that commercial property lending has historically been a key source of financial sector losses during episodes of financial instability, both in Australia and overseas, it is important that lenders and regulators remain alert to the risks in this market," it said.
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Dexus chief Darren Steinberg bullish on values at the ‘coalface’
Turi Condon
[Image: turi_condon.png]
Property Editor
Sydney
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Dexus Property Group chief Darren Steinberg. Picture: Glenn Hunt Source: News Corp Australia
[b]The value of quality commercial property will continue to rise strongly over the next year, with the current negative economic sentiment no longer reflected at the coalface, according to Dexus Property Group chief Darren Steinberg.[/b]
Dexus, which yesterday provided a quarterly update reaffirming its 2016 guidance of 5.5-6 per cent per security growth in funds from operations, struck 78 office leasing deals during the three months, covering 35,088sq m of space.
Mr Steinberg said the past quarter had been the low point in the office market cycle for the $7.4 billion group, with occupancy by income for its towers falling to 93.7 per cent from 95.3 per cent in June. By area, occupancy was 94.3 per cent, down from June’s 95.5 per cent.
Mr Steinberg said he expected to see Dexus’s office portfolio at about 95 per cent full by the end of the year.
“The valuations we undertook this quarter support our view of a further 25-50 basis points of cap rate compression across our portfolio over financial year 2016, with approximately 30 of Dexus’s properties to be externally revalued and announced in December 2015,” he said.
Negative economic factors were not being reflected in recent business demand for space, he said.
Mr Steinberg expected leasing incentives in strong markets, such as Sydney, to fall and there to be less downtime between a tenant leaving and the space being released.
The office and industrial landlord also reaffirmed FFO from the underlying business (excluding trading profits) was expected to grow by 3-3.5 per cent for this financial year.
Distribution growth per security was expected to be 5.5-6 per cent for the year.
The group saw a $40 million lift in revaluations, including a 9.8 per cent increase on its 33 per cent share of the 1 Bligh Street office tower in Sydney, which was valued at $291.6m with the capitalisation rate tightening from 5.75 per cent to 5.25 per cent. Mr Steinberg said Dexus was unlikely to sell its stake.
Dexus shares closed at $7.76, up 23c yesterday.
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Office markets in Sydney and Melbourne on road to recovery
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Source: TheAustralian
[b]Many investors are concerned about the wave of money flowing into property in general, and office markets in particular, driving prices higher in some cities. Are prices too high and yields too low? Can we still invest at these prices? What returns can we expect?[/b]
Our forecast is that the Sydney and Melbourne office markets will retain their strength beyond the end of the decade.
We have a simple methodology. We count demand and supply at the metropolitan level and forecast them separately. That tells us whether we are building too much or too little, and how much space we can build without oversupplying the market. It allows us to forecast vacancy rates, and hence rents and property values.
We calculate an underlying demand for office space from the increase by industry in the number of people employed in dedicated office buildings. It’s a leading indicator of net absorption. In the non-mining cities, we are coming off a period of extremely weak demand. And in Sydney and Melbourne, building has been relatively subdued. Hence the recovery in demand is now leading to a gradual tightening in leasing markets. They will tighten further.
In both Sydney and Melbourne, this will be a long and strong upswing with plenty of time, providing good opportunities for investment and development. That’s not true for other mainland capital cities — they face a difficult future.
Certainly, we are now well into the recovery in rents and property prices following the post-GFC trough. And that’s despite the weakness in demand for office space over the past few years. In both of those cities, face rents are about 20 per cent above the trough, with a smaller rise in effective rents resulting from increasing incentives in Melbourne. To this mix can be added the strong demand for investment property leading to firming of yields and prices.
Sydney office prices are now up by about 45 per cent from the trough, while in Melbourne prices have risen by 37 per cent.
But there’s a lot more to go before this is over. For Sydney and Melbourne, this is just the beginning of the recovery in demand. These are services cities. And business and financial services are the mainstays of office demand. So far, employment in the finance sector has remained relatively flat. But business services employment has started to recover with demand from this sector demand is driven by business investment which remains weak.
Mining investment is only just beginning its decline — about 12 per cent into a forecast 60 per cent fall with the major impact over the next two years. Meanwhile, non-mining business investment remains weak, with the prospect of a gradual recovery. The boost to business services demand and employment will come as it builds momentum two and three years hence.
It was the weakness in demand over the past few years that was unusual. The recovery of demand over the rest of the decade will be a return to more normal conditions.
The other side of the coin is that the impact on confidence has constrained development. While the mining boom cities continued to build at boom time levels as demand fell, Sydney and Melbourne were more pessimistic, probably for the wrong reasons. They thought the weakness of demand was the result of change work practices.
Certainly, companies experimented with activity-based working, but that didn’t lead to any substantial fall in office space per employee. The fall in net absorption is fully explained by the fall in office employment.
The result has been that the softness in demand led to only moderate rises in vacancy rates. And those vacancy rates are now being clawed back as demand picks up. Indeed, the current levels of underlying demand suggest further rises in net absorption.
For property values, the outlook is clouded by the impact of low interest rates and the threat of rising rates. Certainly, that will have some effect on yields and hence prices. But that impact will be more than offset by rising rents, with a direct impact on prices and an indirect impact as expectations of capital gain lead to a firming of yields from that source.
Medium term, property markets are driven by leasing market conditions. That’s what underpins rents and therefore property values. As we read it, we’re only halfway through that cycle.
With interest rates extremely low, the focus is on yields. But that will change and future returns will be augmented by capital growth. There are no real bargains in the market, but we estimate passive investment returns without gearing to the peak at about 10 per cent a year.
Frank Gelber is chief economist at BIS Shrapnel.
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Commercial property lures investors
James Dunn
978 words
28 Oct 2015
The Australian Financial Review
AFNR
English
Asia-Pacific capital - Deals
The flood of capital across borders looking for commercial property shows no sign of abating, with $US407 billion ($561.4 billion) of deals struck worldwide during the first half of 2015, up 14 per cent, property agency CBRE says.
That made the first half the strongest since 2007. And Australia was in the thick of it, as the fifth-most-popular market, with offshore investors snapping up $US10.3 billion worth of sales. CBRE says Sydney ranked fourth on the list of targeted cities behind London, New York and Paris, while Melbourne ranked sixth.
It was a similar story in the third quarter, to September, with offshore investors taking 56 per cent of the $8.6 billion in property traded during the quarter - the highest proportion recorded in the 10 years in which CBRE has tracked these numbers.
September quarter highlights were Chinese sovereign wealth fund China Investment Corporation buying Investa Property Group's portfolio of nine office towers for $2.45 billion - the biggest direct real estate transaction in Australia's history - and Singapore's Ascendas Real Estate Investment Trust buying a 26-strong logistics facilities portfolio from fellow Singaporean Government Investment Corporation of Singapore (GIC) and Frasers Property for $1.1 billion. This was the largest industrial property portfolio ever offered for sale in Australia.
Given the level of transaction activity, Australia is on pace to reach the record $29.6 billion in annual sales in 2014, says Mark Granter, executive managing director at CBRE Australia.
A big factor in that is China. Chinese capital flowing into global real estate markets has almost tripled since 2012, and Australia attracted almost 25 per cent of the $US6.5 billion in Chinese investment capital poured into global real estate markets in the first half of the year.
"The wave of money coming in is not only a Chinese story, it's not only an Asian story, it is a story about foreign capital being attracted to Australia," Granter says. "We've always had a lot of interest from European funds, particularly from Germany, and from Singapore and Malaysia. We're seeing increased interest come from America, but the Chinese interest is certainly a much bigger factor than ever before."
All of these investors are attracted to relatively high yields for high-quality prime office assets, Granter says. "The yields are much stronger than in comparable gateway cities around the world. In Sydney and Melbourne you're probably looking at 'cap' rates [the capitalisation rate is the rate of return based on the income the property is expected to generate] of 5.5 per cent to 5.75 per cent, whereas in London and European markets you're probably talking 3 per cent to 3.5 per cent, Singapore is about 3.8 per cent, Tokyo is about 3.25 per cent and Hong Kong is sub-3 per cent. And with the Australian dollar having traded down from $US1.08 to 72¢, Australian assets have become much more attractive on the currency as well."
But Chinese investors have other, more subjective attractions, he says. "The Chinese interest mirrors their interest in our residential property, to a large extent. Their residential buyers and developers are active down here because they are keen to invest outside China, and from a lifestyle point of view, they really love Australia because of the quality of life, the quality of air, all the things that they don't have back home. But for commercial investors there is also the attraction of Australia's political stability and transparency - the legal system, the planning system, the titles system. They feel totally comfortable with investing here."
Graeme Ross, managing director of real estate at Commonwealth Bank of Australia, says attractive yields, a cheap currency and a different cycle explain much of the strength of the Australian market, but he adds that the investment is coming from a "much broader base" than ever before.
"Pre-GFC, we were very used to seeing investors like the Canadian pension funds and some of the sovereign wealth funds, such as GIC and ADIA [Abu Dhabi Investment Authority]. Now we are seeing the global investment managers, UK investment managers managing European funds, big German investors, other big pension funds, property companies and REITs out of Asia. And then there is the newer wave of investors from Asia, private family companies and businesses with great wealth, and also high-net-worth individuals."
Global capital will "always be volatile," Ross says. "One of the things that will impact the market, just because there is so much capital around the world looking for a place to go, people can sometimes get a bit frustrated. Big investors want big investments, and if we can't satisfy that they will continue their global search. Australia has always been a cyclical place to invest. But I do think that just the sheer weight and volume that we've seen, and the broader nature of the parties investing, will provide a very robust base for our market going forward."
Global investors once tended to prefer partnerships with established local players, but there is now more willingness to buy assets directly, Ross says. "Asian investors like hotels, they like agricultural land, and we're also seeing residential developers, mainly Singaporean and Chinese, coming here and establishing an operation, actually hiring locally. So we're seeing a bit of a shift in approach."
Retail, however, is a slightly different market, he says.
"Asian capital is predominantly interested in office, and then industrial, but they do understand that retail is a bit more sophisticated. It's more management-intensive, you effectively need local expertise to understand the retail environment as much as the retail property environment, and we see that reflected in the retail deals that are struck."
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