Australian commercial RE still attractive for overseas investors in Q3

Oksana Patron

4 November 2022

Overseas investors exhibited continued faith in the Australian commercial real estate sector during the third quarter despite a period of change that is taking place across the key sectors.

A deteriorating economic outlook and fading investor confidence, on top of the pressure of rising interest rates and growing inflation, saw a drop in commercial real estate deal activity in Australia in Q3 2022, with the volume of completed transaction having gone down 24% from a year earlier to $16.6 billion, according to the MSCI Real Assets “Australian Capital Trends Report Q3 2022”.

But overseas investors remained committed and deployed another $4.5 billion to the local commercial real estate sector during the quarter, which was on par with the same period of 2021, and took their year-to-date 2022 total to $14.6 billion.

By comparison, domestic investors deployed 30% less capital to real estate in Q3 2022 compared to the same quarter last year.

Investors from the Asia Pacific region were the dominant source of capital during this quarter, as they allocated $2.4 billion to the market, while investments from outside the APAC region went up 19% during the first three quarters from 2021 but the strong results were helped by the fact that deals were struck in 2021 but fell into the first quarter of 2022 for financial statement.

The US and Singapore-based investors accounted for the largest chunk of overseas investments in Australian commercial real estate in 2022 (59% of transaction volumes), and were followed by Hong Kong-headquartered investors who accounted for around 9% of foreign investments.

However, Chinese investors appeared to have given up on investment in Australia and acquired only $24 million worth of commercial property.

The American investors were helped by the climbing US dollar against its Australian counterpart in 2022 which gave this group of investors an edge over domestic buyers, the report said.

As far as the sectors were concerned, historically cross-border investors remained focused mostly on office assets, which accounted for 58% of all purchases between 2010 and 2019.

Although this sector retained its ‘preferred’ status, the foreign buyers in recent years turned to industrial more and stayed focused on the east coast markets of Sydney, Melbourne and Brisbane.

In terms of deal volumes per sector, the industrial saw the absence of large portfolio deals which helped the sector achieve record levels of activity last year but for the first nine months of this year the sector saw only nine deals compared to 27 for the same time last year.

On the other hand, deal volumes for the office sector fell 10% from a year ago during the third quarter but remained flat during the first nine months while deal volumes in the retail sector fell 41% in Q3 and for the first three quarters were 18% down.

Benjamin Martin-Henry, head of Pacific Real Assets Research at MSCI, said that the market had entered a period of change after the record last year for Australia, but looking at more long-term trends, commercial real estate was still trading above averages.

“Australia is very much in the sights of global investors,” David Green-Morgan, Global Head of Real Assets Research at MSCI, noted.

“U.S. and Singaporean investors have led the way in 2022 and there’s been continued interest from elsewhere. Despite overall volumes dropping in recent quarters, Australia remains one of the most liquid and transparent markets in the region.”