Executive Director, Corporate Trust, Australia
With property investors adapting to a new Covid-era normal, such as using drones to inspect assets, this market is looking increasingly buoyant
Demand from foreign investors in Australian real estate has been strong in the first quarter of 2021, with offshore buyers investing A$2.5bn, according to Real Capital Analytics.
Unsurprisingly, last year was subdued as Covid-19 closed Australia’s borders and prompted increased government scrutiny on all foreign purchases. Foreign investment into the country slowed dramatically, with offshore buyers investing just A$1bn in Australian property in the third quarter of 2020, according to consultants Real Capital Analytics.
However, the market is becoming more active. Many sat on their hands last year, waiting for the crisis to pass. While that hasn’t happened and borders are still effectively shut – apart from a bubble with New Zealand – foreign investors are adapting to the new normal. Instead of physically visiting property, they are using drones, while agents are doing asset walk-throughs on FaceTime video calls. Joint venture partners or ‘on the ground’ teams are taking on more due diligence tasks.
Office investments lead the way
Despite the trend for flexible working – with more people spending part of their working week at home – the office sector is most popular with foreign investors, with Sydney attracting most interest. The New South Wales city is the third most popular Asia Pacific metro, with transactions up 72% year-on-year, behind only Tokyo and Seoul.
Office is followed by the retail and industrial sectors. One reason for growing industrial demand is the rise in e-commerce. As more people buy goods online, more warehouses and distribution centres are needed.
Alternative real estate is also booming, with buyers snapping up self-storage, medical, care and data centre assets.
Intertrust Group Australia has been engaged by parties launching funds in the office, industrial, healthcare and debt sectors. We can help investors set up and operate a trust to hold real estate assets, which brings tax advantages, as well as offering fund administration and custody services.
Where is the money coming from?
The largest source of Australian real estate buyers is domestic, followed by those outside the Asia Pacific region, then Asia Pacific. Strong interest from Singapore continues and there is evidence that North American capital is returning. By country, Singapore is the biggest investor in Australian property, with the US second, according to Real Capital Analytics.
Anecdotally, many of the world’s largest investors have a lot of “dry powder” (funds needing to be invested) and are raising money across all sectors.
Property is attractive because of its ability to generate a yield thereby providing investors with an income stream, which is valuable – especially at a time of such low global interest rates. Its lack of correlation to other assets, such as shares and bonds, also makes it good for diversification.
So why Australia in particular? It’s a mature and transparent market that has always rated highly on Jones Lang LaSalle’s global real estate transparency index. (In 2020, Australia ranked third out of 99 countries). Yields are strong relative to other markets and tend to be higher than in Singapore, Hong Kong and Japan. Strong lease covenants, many with fixed percentage increases, provide security – while there is good potential for capital growth.
The effects of Covid-19
The pandemic had a huge impact on real estate last year, with sales volumes significantly lower than in 2019. Out of caution, Australia’s Foreign Investment Review Board brought in a zero-dollar threshold. This meant every property acquisition by a foreign investor needed government approval. Overseas investment slowed dramatically, causing a huge backlog to build up.
However, with the country getting Covid-19 under control, a sense of normality is returning and thresholds have been restored. The market is very positive, and we are seeing a lot of activity and enquiries.
Future trends in Australian real estate
With demand strong for Australian real estate, we expect further large transactions in the year ahead. In April, Blackstone sold a A$3.8bn portfolio sale to ESR, the largest industrial portfolio ever transacted in the Australian market.
Intertrust Group Australia launched its real estate trustee business in September 2020, and since then we have won some big client appointments, such as JP Morgan Asset Management’s capital partnership with Stockland to establish an actively managed industrial property portfolio worth billions of dollars. We also worked with Baring Private Equity Asia when it purchased the RMIT building, a commercial office tower in Melbourne, and Cabot Properties’ industrial property purchases in Victoria.
There is likely to be more M&A activity in the year ahead: Centuria is in the process of acquiring two fund managers (Primewest and Bass Capital), while the management rights for the AMP Diversified Property Fund have been assumed by the Dexus Wholesale Diversified Property Fund.
As Australia opens up fully to visitors again, we expect an explosion in growth as investors look for new opportunities and relationships. Until that happens, we still believe 2021 will be a busy year, and foresee a buoyant market.
How Intertrust Group can help
- Trustee, custody, fund administration services for foreign clients seeking to buy real estate in Australia
- Corporate services for fund managers that require local director, registered office, co-sec, payroll for their local investment management team
Weekly updates direct to your inbox
Subscribe to receive the latest news and insights, personalised to your role, location and areas of interest.