Australian commercial property looking more attractive to offshore capital: MSCI Real Capital Analytics

26th May, 2022 | No Comments

Australian commercial property continues to look attractive to global capital, according to David Green-Morgan, Head of Asia Pacific Real Estate Research at MSCI Real Capital Analytics, speaking on global fund flows at the recent Property Funds Association (PFA) 2022 Conference in Cairns.

Mr Green-Morgan said capital from the USA, Asia and Europe targeting Australian property continues to increase. “There is currently a large amount of capital chasing quality commercial real estate assets globally, and Australia continues to look attractive to investors.

“Offshore capital continues to target Australia even though yields have tightened, however these low yields are not uncommon globally when we compare Australian assets to other major markets such as London, New York, Tokyo and Paris.

“Office is still the preferred sector for overseas buyers. One point of difference for Australia is the ability to build CPI increases into rental agreements, as these are not common across all markets.”

From a global perspective, Mr Green-Morgan said there were some profound and surprising shifts in global capital as world economies recover from the Covid pandemic. “CBD office was always the benchmark yield but logistics pricing has caught up with office in some markets, as we’re seeing this big movement of capital into industrial and logistics property.

“Another big theme is the rental apartment sector. Build-to-rent has experienced a Tesla-like acceleration in the USA and Europe, and is starting to attract investor interest in Australia.

“Currently in Asia Pacific, Japan is the only market with any depth in the build-to-rent sector.”

Another pandemic-driven theme has been the boom in data centres, which has the potential to be a sustained trend in the Asia Pacific. “There’s huge interest in data centres in the Asia Pacific, but there’s also a lot of ground to be made up in this region.”

Overlaying all of this is the rise in ESG, according to Green-Morgan. “The ESG landscape is changing, and accelerating. The legislation, standards, and requirements, are likely to increase following global commitments to emissions reduction made at the Glasgow summit.

“We’re seeing the higher rating green buildings perform slightly better than other buildings overall. It’s interesting to consider whether green buildings will over time produce better performance.

“In Europe, the proportion of green buildings being traded is increasing dramatically. And we’re seeing that younger, greener buildings tend to experience stronger price growth. It’s also likely we’ll see funds pushed toward younger and greener buildings to satisfy compliance and risk management requirements.”

Fund flows and trends within Australia
Benjamin Martin-Henry, Head of Pacific Real Estate Research at MSCI Real Capital Analytics, discussed commercial real estate investing trends within Australia at the PFA 2022 Conference, and possible drivers behind another record quarter for commercial property transactions in Australia.

“We’ve just had another record quarter in transactions, which is the third quarter in a row. It’s much more than a bounce-back from Covid. There’s a huge appetite for Australian real estate from both offshore and local buyers.

“Bigger deals have been driving the growth. Smaller deals have come off, which is often an indicator that things could slow down a little bit, as generally it’s the smallest deals which slow first.”

Mr Martin-Henry said other asset classes were gaining interest following a two-year period where industrial property had been leading the way. “We have seen more capital starting to move back into hotel and retail sectors.

“Hotels are picking up as economies open, and there appears to be strong interest in hotels among cross-border buyers.”

Commercial real estate capital is also following domestic population trends by branching out into the regions. “Overseas investors are still investing in the core, big cities such as Sydney and Melbourne. But more local investors are looking to regional Australia, and it will be interesting to see if this push to the regions indicates a more structural or cyclical change.”

Mr Martin-Henry said alternative assets continue to gain traction and move towards the core. “Self-storage has boomed. Child care has performed well, and child care tends to involve very long leases as well. We are also seeing lots of activity in healthcare, seeing strong returns and volumes.

“There has been a big increase in new entrants for alternative assets, for example new investors going into child care. The challenge with alternatives is they are small and it’s hard for investors to make a splash.”

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