Foreign investors are set to swoop as listed real estate trusts put billions of dollars worth of offices towers on the block in a bid to cut debt.
The buyers are big offshore players, often sovereign wealth funds with deep pockets and the ability to buy in the depths of the cycle, banking on an economic recovery and a return to the office once the coronavirus pandemic has passed.
In just the last week big sales appointments have been made by Abacus Property Group and US insurance company Nuveen, with others running quieter off-market campaigns.
The sellers are diverse, ranging from Dexus, Charter Hall and Woolworths Holdings, owner of David Jones, which is close to short-listing bidders for its Sydney department store.
Private players are driving the race, with Precision pitched against funds manager Ashe Morgan and listed property funds group Charter Hall in a process run by investment bank UBS.
Larger buildings are being put on the block, with American asset manager Nuveen putting up a half-interest in North Sydney landmark 101 Miller Street and Greenwood Plaza, with the offer of a stake in the $900m asset tipped to bring out big global players.
The funds manager bought its half-interest from Eureka Funds Management six years ago for more than $300m and has benefited from holding as North Sydney has been redeveloped, with agencies Knight Frank and Colliers International handling the sale.
Meanwhile, the listed Abacus Property is selling a half-interest in a nearby North Sydney office building it bought off the Oxford Investa Property Partnership for $311.3m just last November.
The sale of 99 Walker Street, via Knight Frank and JLL, is being billed as a partnership opportunity, with the vendor hoping to go close to last year’s pricing despite the impact of the pandemic.
Even as the nation’s central business districts remain quiet, casting doubt over the longer-term value of major skyscrapers, large property owners and the foreign funds that back them believe there will be a strong recovery as corporate Australia grinds back into gear.
The world’s sovereign funds are continuing to invest, with the China Investment Corporation boosting its stake in Sydney landmark Grosvenor Place and a host of Singaporean trusts buying major suburban office blocks as they punt that even locked-down Melbourne will come out of the crisis in relatively good shape.
CBRE has recently recorded bids of about $7bn for Australian properties. Much of the demand is coming from offshore players who see Australia as attractive.
CBRE head of international capital, Pacific and Southeast Asia Stuart McCann said offshore investors were “very much relative investors”.
“They benchmark Australia with other global gateway markets and from an investment perspective Australia is rated among the highest in Asia-Pacific, which is really supporting the flows of the cross-border capital,” he said.
Positive medium-term recovery expected
McCann also cited the volatility of the equities market and the low yields on bonds, which has meant the yield spread on Australian property relative to the borrowing rates make it attractive and more stable than other asset classes.
“There is a growing view that Australia will enjoy a very positive medium-term macroeconomic recovery off the back of the eventual border reopening,” he said.
McCann said real estate investors understood the suffering in leasing markets was short-term while in the medium term Australia had good prospects.
He said interest was coming from Singapore, Hong Kong. mainland China, the US and Japan.
Other advisers also see Australia as an important market for deploying core property capital. A recent survey by real estate firm JLL of 38 global investors holding close to $2 trillion of assets showed half plan to increase their exposure to Australia by the end of 2021.
Given the strong underlying drivers for logistics real estate, 81% of them plan to lift their exposure to this sector by the end of next year, driving a real recovery in market turnover.
But it’s tough at the coalface as agents are forced to sweeten leases with soaring incentives to attract tenants to new developments.
Morgan Stanley sent office stocks down on Monday after it said investors should take a cautious approach to the sector, arguing that office vacancies in Sydney and Melbourne could escalate to 10-15 per cent as a result from people working from home. This could see Sydney rents plummet by 20 per cent.
“While much of the discussion around the office market post-reporting season has been around longer-term work-from-home take-up, we think the most pressing issue — and what will drive share price performance in the near-term — is the cyclical pressures as Australia heads into a post-COVID recession,“ Morgan Stanley said.
Morgan Stanley warned the risk of rising unemployment, lower occupancy and higher incentive levels, meant that cashflow could rapidly decline across office portfolios.
But the offshore investors are betting that any downturn is only for the short-term.
JLL’s head of capital markets, Australia, Fergal G Harris, said investors remained positive towards Australia and they had capital to deploy into core opportunities.
“Investors are subscribers to the long-term office demand story with investment-grade office expected to remain central to investment strategies going forward,” he said.
They are chasing alternative property sectors like healthcare but there was also a clear commitment to traditional core real estate sectors.
