Developers rule as residential race rolls on

Developers are continuing to dominate the commercial property investment market, snapping up huge volumes of property as they ride the residential wave.

Real Capital Analytics data shows developers accounted for almost 40% of investment activity in 2016, up from just 25% 10 years ago, as competition for potential residential development sites continues unabated.

The increase in developer activity has seen investment from real estate investment trusts slide, with the previously dominant buyer group accounting for just 25% of investment volumes last year, down from 35% a decade ago.

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Private equity is also proving to be a big mover, making up 6.2% of investment in 2016 to become the fourth-largest investor type, well up on its 1.8% share in 2006. That growing share has been driven largely by heavy activity from US-based Blackstone, which last year picked up three malls in Victoria and Queensland for more than $600 million, as well as a mixed-use Adelaide’s mixed-use office and retail complex at 80 Grenfell St and Rundle Place in Adelaide for $400 million.

REA Group chief economist Nerida Conisbee says developers continue to see value in residential developments, despite reports the market could dive due to oversupply.

Interest in potential development sites continues to drive investment.

“The increase in developer activity is because the residential market has been such a strong performer,” Conisbee says.

“There are a lot of groups, particularly in Sydney and Melbourne, who have made a lot of money developing residential, and to continue the pipeline of development they have to acquire sites.”

“Strong interest from Chinese groups in developing residential is a driver as well.”

We may see a pickup in the listed sector, as well as investment managers, however private equity is the buyer category to watch

Conisbee says investment by private equity groups will likely continue to eat into the share of REITs.

“The decline of listed (REITs) is interesting – globally, private equity does seem to be a strong source of capital for all sorts of investment,” she says.

“Commercial property is no exception. Although it is still a lot less than listed, it is growing in importance.”

Blackstone had a huge 2016, buying a string of properties including 80 Grenfell.

Other investor groups have also dropped away.

Investment managers made up 14.5% of investment volumes in 2016, down from 19.2% in 2006, while banks dipped from 6.8% to 2.6% and pension funds from 5.8% to 3.8%, the data shows.

But developers may not dominate forever, Conisbee says, with predictions interest in residential developments will wane.

“It is likely that the strength of the developer market will slow over time as the heat subsides out of the residential development sector, particularly in Melbourne,” she says.

“It will probably take a bit longer in Sydney. We may see a pickup in the listed sector, as well as investment managers, however private equity is the buyer category to watch.”