Melbourne, April 09, 2018 – Melbourne has pipped Sydney as the top Australian city for investment in the Asia Pacific region – coming second only to Tokyo as the preferred destination for commercial property investors.
Findings from CBRE’s 2018 Asia Pacific Investor Intentions Survey revealed the Victorian capital’s rank as preferred destination for cross-border capital improved from eight in 2017 to second in 2018, surpassing Sydney, whose rank fell from first to sixth.
Ranking in at number eight, Brisbane was the third Australian city to make the top ten – up from 10th spot in 2017.
CBRE Research Director, Australia, Bradley Speers said the results highlighted an increasing focus on investment diversification – encompassing both asset type and geographic position.
“With yields reaching the bottom of the compression cycle in many markets, including Sydney, investors are more focused on rental growth for achieving capital growth, and diversification as a means of reducing portfolio risk,” Mr Speers said.
“While some investment focus has shifted from Sydney to Melbourne, this is mainly Asian based, with Australian respondents surveyed still showing a preference for the New South Wales capital as a destination for capital,” Mr Speers said.
CBRE Senior Managing Director, Capital Markets, Mark Coster said while core assets remained a focus for most investors, there was growing interest in core plus and alternative asset classes.
“Investors are shifting their focus in some cases from to traditional asset classes to alternative assets such as healthcare and education due to the higher risk adjusted returns often available,” Mr Coster said.
“Melbourne in particular is becoming increasingly compelling from an investment point of view, offering more opportunity in terms of stock availability and capital growth prospects – combined with its security as a gateway city with international recognition.
“Investment interest in Melbourne is underpinned by its income growth story – with strong rental uplifts forecast across all sectors over the next two – three years. This is driving capital growth and combined with continued yield compression in most parts of the market.”
Mr Coster said growth in omnichannel retail was also propelling significant investment demand for industrial & logistics assets.
“Ongoing growth of online retail is repositioning the industrial & logistics sectors as one of the most in demand investment asset classes, with distribution centres now acting as a proxy for retail assets. Typically secured by long-term leases and strong covenants, their appeal is only going to increase further,” Mr Coster added.
The survey revealed Asian outbound real estate investment reached a record high in 2017, totaling US$83.4 billion, with 92% of respondents indicating their investment activity this year will be the same or greater than that of last year. In particular, real estate fund managers showed stronger intentions to purchase more this year, with approximately US$53 billion of real estate private equity capital forecast for deployment in Asia Pacific real estate by 2020.
“Stable income streams and asset class diversification will ensure a continuation of robust real estate investment activity in 2018. In comparison with other asset classes, real estate has provided more stable returns over the past decade while also being less volatile, which is strengthening investor appetite,” said Rob Blain, Executive Chairman, CBRE Asia Pacific.
The report also reveals Asia Pacific investors are less concerned about global and regional economic shocks – in contrast, investors are more concerned about property prices, amid what is still an intensely competitive market for prime commercial real estate in Asia Pacific. The availability of stock is less of a concern in this year’s result, with more investors indicating that they are willing to sell. However, investors still find it hard to justify current pricing.
The high price of prime core assets continues to drive investors towards a core-plus strategy—investing in prime assets in non-core areas, or non-prime assets in core areas—as well as value-added strategy, which has for the first time ever overtaken core strategy as the most preferred asset in our study.
Preferred investment strategy 2016-2018
“Investors are exploring different ways to create value through asset enhancement, such as incorporating retail elements into office buildings or upgrading of assets,” commented Henry Chin, Head of Research, CBRE Asia Pacific. “Understanding occupiers’ requirements will be critical for value-added investors. With occupiers increasingly demanding flexible leasing terms and space usage, many investors hold the view that flexible space is the future of the office work environment.”
According to the results, office occupiers identify co-working centres as an ideal strategy for increasing their space requirements over the next two years. By comparison, 42% of investors rate flexible space as the number one occupier trend that will have the most impact on real estate value.
“Flexibility in the workplace is here to stay and one of the best strategies to improve the attraction of a building. Our results indicate that half of investors surveyed believe that having up to 20% of a building contain co-working space will enhance a building’s value. Given that we are virtually at the end of the yield compression cycle, and that investors see co-working as a means to add value, we expect the number of co-working options will increase over the next few years,” Dr Chin said.
CBRE’s fifth annual APAC Investor Intentions Survey was compiled from over 350 responses and was carried out online between November 15, 2017 and January 31, 2018. The survey covers a wide range of real estate investors, including funds or asset managers, private equity firms; developers, listed and private property companies, listed and unlisted REITs; and sovereign wealth funds, insurance companies, pension funds and family offices. Around 80% of respondents are companies domiciled in Asia Pacific and the other 20% are domiciled primarily in Western Europe, the Middle East and North America.
View CBRE’s full research here.