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Outlook for the Australian investment market

November 25, 2013 / By

Total transactions for the Australian commercial property market (office, retail and industrial sectors) have reached AUD 17.7 billion for the year to date. Already, this represents the 3rd highest year on record. Volumes are now just 8% below the all-time high achieved in 2012 (AUD 19.2 billion).

Domestic and offshore groups have both been active in 2012 and 2013. Offshore investors remain active participants in investment markets, accounting for one quarter of all direct market transactions in 2013. A number of offshore investors have looked to partner with domestic managers, to access product and assist in the management of idiosyncratic risk. One of the main avenues for major offshore groups to access the type of investment product that meets their desired criteria has been to invest in development projects. This partly reflects the limited opportunities to acquire similar large existing assets, a challenge which domestic investors have also faced.

Following a series of major individual asset sales and portfolio transactions in the direct market, a number of REITs are now looking to increase scale with offers for Commonwealth Property Office Fund and Australand likely to be a precursor for further M&A activity in 2014. Further, there has been an increase in the number of IPOs. However, the results have been mixed with some offerings over-subscribed, while others have failed to meet equity raising targets. Investors are cautious and scrutinising individual opportunities, assessing the risk reward trade off quite carefully. Similar trends are evident in the direct market where challenged assets, or assets with risk attached, are being priced according to the physical market conditions. This suggests that despite the volume of capital, investors remain cognisant to adequately price risk.

So how will the investment market dynamics change in 2014 given the strong momentum in the investment market and limited availability of preferred assets? There are a number of potential outcomes, some of which are already occurring. These include; further bidding up of prices and yield compression for long dated lease product. Some investors, however, will be willing to move up the risk curve and acquire non-core assets, which can be actively managed to drive returns. The question investors will need to consider is ‘can we manage the unsystematic risk with leasing markets subdued’?

One alternative for domestic investors which has been evident in the past is the option of investing in overseas property markets. We believe this is unlikely to occur in the near future for the A-REITs as the process of repatriating funds has only recently been completed. Some evidence has already emerged of Australian superannuation funds moving offshore as the domestic market is too small to absorb the amount of capital to be allocated to real estate over the next decade. On this basis, there is likely to be a growing pool of pent up capital which is likely to see investors move further up the risk curve to deploy capital.

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