Thursday, March 26, 2009

Window of opportunity opens in Aussie commercial property

THE Australian commercial property market is currently offering global investors with a medium-term horizon a combination of relative stability and increasingly attractive investment returns.

Jones Lang LaSalle recently undertook a number of investor briefings across Asian markets, including Singapore. It was apparent from these briefings that there is significant Asian interest in the Australian property market, due to its relatively stable fundamentals. This has presented a window of opportunity for investment in Australia - with commentators suggesting that these are the best conditions for foreign investment that we have seen in the past decade.

The fundamentals of Australian commercial property markets have deteriorated moderately in the face of a broad economic slowdown. Australian institutional property investors have not been immune from the effects of softening asset prices, rising debt levels and tighter credit markets.

The A-Reit (Australian real estate investment trust) index has lost about A$120 billion (S$125.1 billion) in value over the past 15 months.

The benchmark S&P/ASX 200 A-Reit Index is around 690 points, down 73 per cent from its high of 2,575.6 points in February 2007.

A-Reits require debt refinancing of around A$60 billion over the next three years. About A$26 billion has been lent by foreign banks, some of which have shown an inclination to repatriate these funds during this difficult period. Given the imminent debt expiry profile in the next three years, there are now realistic vendors willing to offer quality assets for disposal in an attempt to reduce funding pressure.

Furthermore, the pool of funds invested in superannuation will continue to be a force in the domestic property markets. While the pool accounts for A$1.1 trillion today, it is forecast to grow to over A$3 trillion by 2016. With an average 10 per cent of this pool, or A$23 billion per annum, allocated to real estate, a significant amount of capital is destined to seek out a home in property markets in the years to come.

A window of opportunity does exist for foreign investors to capitalise on a culmination of market forces that make investment in Australian property an attractive proposition in 2009.

What we are currently seeing is a number of Asian-based institutional investors taking advantage of these market forces. Australia is not immune from what is happening in the global property market, but we do compare favourably to the United States, Europe and Asia in terms of the impact of the global credit crisis.

Due to the impact of the global economic environment, there are superior Australian assets on the market that have traditionally been tightly held and have not been on offer for over a decade.

There are estimations that these assets probably won't be offered again for years to come, so now is the time for opportunistic cashed-up investors to act. It is a rare opportunity and we are seeing some prospective investors who are awaiting further falls in values of prime Australian assets, but they should be careful not to wait too long.

We are currently witnessing investors out of Asia with an appetite for Australian property. These are largely private equity firms or groups acting on behalf of institutional investors. Such investors are best characterised as opportunistic funds with a focus on income stabilised assets, with no immediate vacancy.

The Australian market is attractive to foreign investors due to its high level of real estate transparency, historically low interest rates, lower hedging costs and relatively stable returns. Australia has historically been an attractive market for investors seeking to lower volatility in their portfolio.

International investors are now spoilt for choice, with significant levels of stock available on both a local and international level. Property markets are increasingly competing on a global scale with increased investigation of country economic fundamentals, property cycle position, vendors' willingness to transact and other property market specifics. We believe the Australian market is well poised to meet such criteria.

Australia enters this cycle with very low vacancy in the major CBD office markets. Research figures for the fourth quarter of 2008 show that the vacancy rate across all CBD office markets that Jones Lang LaSalle monitors nationally was only 5.5 per cent.

Vacancy pressures are clearly increasing. However, the headline vacancy rate remains below the long-term average of 8-9 per cent. The future supply pipeline is moderate, much different from the previous down cycle in the 1990s. Over the next three years there is presently only 1.31 million square metres under construction in the CBD office supply pipeline, which compares favourably to the 2.52 million sq metres that was completed in the three years leading up to 1992.

The headwinds buffeting the global economy have continued in recent weeks and we know that 2009 will be a tough year. There are many factors to consider in this economic environment and owners and investors need to constantly monitor their portfolios to ensure they are positioned to take advantage of the market fundamentals.

The writer is director, international investments, Jones Lang LaSalle, Australia

Source: Business Times, 26 Mar 2009

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