Role of private investors in Australian capital markets
August 27, 2012 / By Andrew Quillfeldt
Private investors and syndicates tend to be a relatively low profile buyer type in Australia. Institutions are regularly the focus of media and analyst commentary but private investors and syndicates are important in Australian commercial property markets. On average over the past 25 years they have accounted for approximately one third of buyers. Typically, purchases by this category increase during market downturns as high net worth investors emerge to take advantage of significant asset price corrections. This occurred in the early to mid-1990’s following Australia’s last recession and the subsequent major property market downturn and it also occurred in 2009 following the Great Financial Crisis. These buyers are therefore important as they provide liquidity during periods of capital constraint.
This can benefit certain real estate markets and sectors more than others for price point reasons. The type of property predominantly targeted by these buyers is secondary grade CBD office buildings, neighbourhood shopping centres and non-institutional grade industrial warehouses.
The chart below shows the volume of sales to private investors and syndicates since 2007. Two interesting trends are reflected in this chart. Firstly, apart from the boost in 2009, investment volumes have been relatively stable and consistent in recent years. Secondly, 2012 is turning out to be a strong year for acquisitions by private investors and syndicates, with just over AUD 2 billion worth of transactions recorded so far in the year to August.
Demand from this category is therefore still relatively robust although availability of product has been a constraint for these investors in recent years. Prime grade assets remain almost exclusively targeted by institutional capital and banks remain reluctant to lend to private investors on secondary grade assets in some cases, particularly on properties with some element of leasing and vacancy risk.
The cost of debt finance in Australia has come down in 2012 as a result of the 125 basis point cut in the official cash rate since November 2011. This lower cost of debt finance is partly driving this increase in investment by private investors and syndicates. Another driver has been the relative performance of commercial real estate compared with alternative investment options. The investment characteristics of real estate remain attractive to private investors for a variety of reasons. For example, it can offer low volatility, a secure long term income stream and a hedge against inflation. In addition, the supply/demand fundamentals are attractive in most markets and the outlook is for moderate income and capital value growth over the short to medium term. Private investors are likely to become a less significant contributor to commercial real estate investment at some point, probably when institutional investors begin to venture up the risk curve once again. There is very little evidence of this happening just yet and at present it is likely that private investors and syndicates will remain active in the commercial real estate market.
