Are overseas investors shifting the commercial market?

The great US debt ceiling debacle highlighted the importance of cross border investment, but is this the driver behind the rebound in commercial property sales? Paul Thornhill investigates.

In the boardrooms of commercial agencies high above Martin Place and Collins St, overseas investors are now an increasingly frequent sight.

American, Singaporean and Chinese buyers are prominent, with foreign investors spending $39 billion in 2011-12 according to the Foreign Investment Review Board.

I asked CBRE Senior Research Manager Claire Cupitt what is driving this interest and whether their purchasing power is shifting the market’s fundamentals.

“Our numbers show this ‘weight of money’ phenomenon has tapered off since 2012 but I think this is a case of investors consolidating after their first purchase rather than a retreat.”

“We’re seeing plenty of ‘funds through’ deals, where a developer markets a prime office building to an investor with rental guarantees. These investors love the acquisition a new building with secure income, mitigating any leasing risk.”

Asian buyers have seen strong growth in their home markets and are diversifying into safe markets like Australia – especially those from China who have been venturing abroad only in the last few years.

Cupitt points out that US investment houses and Canadian pension funds have been just as active. But while overseas investors are prominent, CBRE’s numbers prove Australians are the real growth driver, with local sales reaching their highest point since 2008.

Commercial property transactions four quarters to September

Commercial property sales activity rolling 4 quarter sum – Source: CBRE

“It’s the local resurgence which is fundamental,” Cupitt told RealCommercial, “Investors are looking though the cycle out to 7 and 8 years and the core office assets they are buying are tightly held.”

“Yes there is an uptrend in overseas demand, but super funds and local listed and unlisted trusts are the real story behind acquisitions growth.”

“With limited prime office stock on the market, prominent buyers like super funds and REITs have to compete aggressively to build up their funds under management.”

Cupitt also stresses that on the tenant side of the equation, markets like Sydney’s CBD derive 60% of its tenant demand from finance and insurance, so the health of an important sector can exert great influence.

So would any fall in international interest affect the commercial property market?

“In the short term, it may reduce demand somewhat, but I expect the fallout would be minor.”

“Even if overseas demand reduces over the long-term, I expect the slack will be taken up by local purchasers in line with any improvements in the local economy and the increase in super contributions to 12%.”

Source: Foreign Investment Review Board, 2011-12