10 Apr 2014
By Alastair Hughes, Asia-Pacific CEO at JLL and a member of the company's Global Executive Board.
My first trip to Australia as JLL Asia Pacific CEO was just after the Global Financial Crisis in early 2009. I asked our Head of Research for a summary of the prospects for the real estate market and his answer was simple: “it’s all about China.” And indeed it was.
A wave of cash triggered by Beijing’s RMB 4 billion fiscal stimulus package was about to hit the shores of Queensland and Western Australia where the mining sector was already buoyant. Infrastructure investment and wages rocketed, as did demand for office space in Perth and Brisbane as mining companies, engineers and lawyers moved in. They were heady times.
Australians are not often accused of a lack of confidence but five years on and I’ve arrived back in Perth to find the mood a little less exuberant, a little more reflective, but certainly not depressed. Chinese growth is slowing and Australia’s policy makers face the challenge of weaning the economy off mining. They’ve slashed interest rates and now wait to see if it will have the desired effect of spurring growth in non-mining sectors like retail, manufacturing and construction.
Of course the property dynamics in Perth are different from those in Sydney, the international investor gateway to Australia. Historically fortunes here have been influenced by New York more than Beijing, with international banks and finance houses expanding and retracting their Asia-Pacific footprint in tandem with global financial markets.
America’s economic recovery is therefore reason for cheer in Circular Quay. It hasn’t translated into growing demand for office space yet, but we anticipate a tangible positive effect in 2015.
Another major driver of growth in demand for office space in Sydney has been the housing market cycle as increasing amounts of commercial property are converted into apartments. Since the start of 2013 seven office buildings have been sold in the CBD for conversion into residential properties. Asian buyers are among the most keen largely because of their confidence in and access to Asian buyers who will be the ultimate consumer.
Sydney has long been an appealing target for foreign investors, especially Europeans and North Americans, but with continuing growth across the region, offshore interest from Asian investors looking for a safe haven is set to increase. We are viewed as the “London of the East” said one Sydney-based investor.
But Sydney is relatively small and as competition heats up overseas investors are already starting to venture down to Melbourne and up to Brisbane, as well as venturing away from the traditional CBD to non-traditional locations where yields are higher.
It’s not just Chinese, Malaysian and Singaporean billionaires vying for a bigger piece of the Australian pie. Domestic super funds are increasing too as Australia’s vast pension reserve (the fourth largest asset pool in the world by some measures) is further swelled by the gradual increase of compulsory contributions over the next five years.
Add in the large domestic REITs, the active private investor sector and more and more banks chasing lending opportunities and there’s certainly no shortage of money looking at property. As the competition heats up, we’re already seeing investors moving up the risk curve in their search for investment assets.
Retail real estate is one beneficiary, with investors seeking new assets and new locations despite Australia’s weak retail spending performance since 2007. Last year eight regional shopping centres were sold, of which seven are now partly owned by institutional investors, domestic and foreign, reflecting both the appetite for high quality retail assets and the relative scarcity of these assets. But sub-regional centres, which only a few years ago weren’t widely regarded as institutional-grade assets, have seen the greatest increase in investment volumes. Interest is also growing in smaller neighbourhood centres.
These huge walls of domestic and international investment money chasing real estate are masking some of the underlying weaknesses in the Australian market as the economy adjusts to post-GFC realities. The music has certainly been turned down, but my sense is that the morning after the night before may not be as painful as many fear.
This article first appeared in the Nikkei Asian review