GLOBAL investors said reasonable prices, attractive yields and tightening supply have made Melbourne the top destination for investment and development in the Asia Pacific region, narrowly beating runner up Singapore and Sydney, according to forecasts by the Urban Land Institute and PwC.
According to the ULI and PwC’s Emerging Trends in Real Estate Asia Pacific 2019 report, Melbourne’s rise in the rankings is due to that fact that its office supply pipeline is more constrained than in Sydney. With vacancies shrinking rapidly, this is likely to provide upward momentum to rents in both locations. The report said during 2018, rental growth has been “phenomenal” in both cities.
It said whilst yields have compressed in Melbourne, they are still attractive by international standards, running at around 4.5% for prime office and retail, and 5.5% for good industrial space.
The report said real estate prices are slightly more reasonable in Melbourne, and office vacancies are low in both Sydney and Melbourne, at around 4%. However the report added that the real problem in Australia lies in actually getting money into the market.
“Although activity by Chinese buyers has ebbed in 2018 due to problems moving capital out of China, other foreign institutional buyers (especially American) have been happy to take their place.
“The result is that foreign buyers currently account for some 40% of all transactions for prime assets in Australia,” the report said.
One respondent said in the report that Australia ticks all the boxes for global mandates.
“Why is Australia such a magnet for foreigners? It’s that “we just tick the boxes for global mandates – the fact that Australia is triple rated ticks one box, and its prime commercial, so that ticks another box. It’s also just a weight of capital issue, and the fact that they’re still getting a good risk spread premium even on those [tight] cap rates,” they said.
ULI Australia Chair and head of retail at Mirvac Susan McDonald said the report shows that many investors in the region are looking to Australia’s largest cities for investment opportunities.
“Both Melbourne and Sydney are core markets at heart but we are seeing that with the number of investable assets significantly lower than in Japan there is strong competition to place capital, especially with so many international players looking to buy,” McDonald said.
PwC Real Estate Advisory partner Tony Massaro said value-add plays remain the target of choice for many investors in Australia, with asset enhancement being used as a means to boost returns.
“The sheer weight of institutional capital, both domestic and foreign, has pushed yields down further in core markets, with most investors reporting that finding assets to purchase continues to be difficult.
“From a lending perspective, continuing pressure on banks from the Royal Commission and rising US interest rates will tighten lending even further, particularly for developers,” he added.
Meanwhile with so much capital targeting core assets in Sydney and Melbourne, other cities, Perth and Brisbane, are now getting more attention. However one local player told the report, “It’s probably more of a theory than an ongoing trend. Weight of capital is forcing people into those markets because they can’t find other places to put their money. They’re not necessarily looking for better returns, though they’ll demand them, [they’re] just looking for places to put their capital. But it’s pretty cautious capital in those markets [because] they tend to be more cyclical.”
Rounding out the top five markets are Tokyo and Osaka. Tokyo has always been a favourite for institutional buyers due to cheap finance, attractive leverage, a good spread over interest rates, and a large stock of investment-grade assets.
As for Osaka, the report said the lack of reasonably priced core assets in Tokyo continues to push investors into regional Japan, where local economies are now increasingly mature and stable. With supply tight in both residential and office sectors, the city is now probably the top market outside the capital.
Looking at the Asia Pacific region as a whole, ongoing competition among investors to place capital is continuing to shape how investors approach the sourcing of assets, despite signs the market may now be approaching a cyclical top.
In particular, value-add plays continue to be a focus, as owners look to upgrade assets. As a result, investors today say they are likely to be more site specific, working from the ground up rather than the top down.
Other trends to watch for the APAC region in 2019:
- Logistics facilities. The only sector where investor opinions were uniformly bullish, investment allocations to the sector have risen significantly in 2018.
- Co-living as a template for future housing. As cities are becoming denser and housing costs rise, more developers are looking to co-living as a way to pack more people into smaller areas.
Leading buy/hold/sell ratings for the various asset classes are as follows:
- Office — buy Ho Chi Minh City and Tokyo, sell Taipei and Auckland.
- Residential — buy Ho Chi Minh City and Bangalore, sell Kuala Lumpur and Auckland.
- Retail — buy Ho Chi Min City and Mumbai, sell Taipei and Kuala Lumpur.
- Industrial/distribution — buy Bangalore and Mumbai, sell Taipei and Kuala Lumpur.
- Hotels – buy Tokyo and Ho Chi Minh City, sell Taipei and Beijing.
Australian Property Journal