Institutional investors charge into Australia property market
Institutional investors have flocked to Australian real estate in the second quarter of this year, lured by substantial price cuts since 2022 peaks across the industry’s leading sectors.
The $6 billion allocated by investors to Australian real estate in the June-ended quarter, or Q2, was $1.16 billion (24%) more than they allocated one year earlier, and roughly double the total flows in Q1, according to MSCI’s Asia Pacific Capital Trends Q2 report, published in early August.
Of Asia’s five most popular countries for real estate investors, the only other to see an increase in Q2 was Hong Kong, where investors spent $1.7 billion, up from $1.48 billion one year earlier, according to MSCI.
Meanwhile China, Japan and South Korea, all saw investor allocations fall.
JLL
“While the interest rate outlook has been volatile, seller expectations have moderated in Australia as ‘higher for longer’ sets in,” Luke Billiau, head of capital markets, Australia and New Zealand at JLL in Sydney told AsianInvestor.
In a region where sellers have been reluctant to cut prices in line with buyer expectations, causing real estate transactions to seize since 2022, peak-to-trough price falls in Australia have been significant, driving a recovery in transaction volumes.
“Transaction volumes have increase 27% year-on-year in H1 2024,” James Kemp, head of Asia Pacific real estate, Macquarie Asset Management, Sydney told AsianInvestor.
MSCI
Q2 saw “a continuation of price falls across real estate sectors” as well as write downs in portfolio valuations among funds and investors in statements marking the end of the financial year, Ben Chow, head of real asset research, Asia for MSCI in Singapore, told AsianInvestor.
OFFICE DISCOUNTS
In Australia's prime CBD locations, office prices fell 21% between their Q2 2022 peak and their Q2 2024 trough, according to JLL, which predicts a further 2.5% fall before the end of the year.
Chow said the three months to June saw the first sales of premium grade office buildings in Australia for more than two years including the June sale by developer Mirvac Group of a 66% interest in 55 Pitt Street, a A$2 billion ($1.34 billion) office project in central Sydney to Japanese conglomerate Mitsui Fudosan.
“For offices, there has also been enough evidence to provide clarity on pricing and growing recognition that there is liquidity and a market for office assets that is underpinned by occupier performance. There is greater motivation among vendors to reset portfolios, strengthen balance sheets and re-allocate capital in a way that aligns with their long-term strategy,” said JLL's Billiau.
“With prices having declined substantially from peak values and yields expanding by more than 150 bps, investors have been tempted back into the sector,” noted the authors of MSCI’s Asia Pacific Capital Trends Q2 report.
Industrial property, prices fell 11% between Q2 2022 and Q2 2023, since when they have recovered by 5.6%; since the 2018 peak in retail prices, these have fallen by 29%, according to JLL.
JAPAN ALTERNATIVE
Knight Frank
These developments are proving particularly attractive to investors looking to shift allocations away from Japan, where flows slumped by 39% to $6 billion in Q2, in anticipation of the BoJ’s first rate cut since 2006 which materialised in July.
“The rise in policy rates and tight cap rates in Japan will make other developed markets in the region look more attractive. Australian commercial property, which has repriced the most in the region, is a compelling alternative,” Alice Crowley, director, international capital, at Knight Frank in Singapore told Asian Investor.
LIVING AND LOGISTICS
Kemp pointed to living and logistics as favoured sectors for investors in Australian real estate. “These sectors are showing the strongest fundamentals, and a number of investors are still relatively underweight these sectors, especially in APAC,” said Kemp.
Macquarie Asset Management
But Billiau agreed that the two sectors had historically been most favoured but that this year, investors were now expanding allocations into office and retail sectors, where prices had seen significant falls.
“Logistics and living have been the most favoured sectors for many groups for some time, but demand is broadening as opportunities and relative risk-adjusted returns emerge in other sectors. We’ve seen a pick-up in activity in office in H1 2024 and retail is garnering a lot more interest from institutional groups – with liquidity for scale returning to retail now that yields have adjusted higher and income is growing from a more sustainable base,” he said.
Kemp predicted that allocations were likely to remain strong in the coming 12 to 18 months “as interest rates soften from cyclical highs as inflation eases further and central banks become more focused on lifting growth.”
But, with future price increases likely to be more muted than previous cycles, investors hoping for sharp gains from their new allocations to Australian real estate were likely to be disappointed, warned the authors of MSCI’s Asia Pacific Capital Trends Q2 report.
“Australia’s recovery is not expected to be V-shaped, however. With interest rates remaining elevated it is unlikely to reach the heights of the years prior to 2023. This is particularly true for the office sector,” they noted.