Investors pour $29b into commercial real estate bricks and mortar

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Investors have poured $29 billion into office, retail, industrial and hotel assets in the past year, with close to a third of the cash coming from overseas sovereign wealth funds and high net worth individuals.

It comes as the real estate investment trust sector enters a big week of the reporting season for the 2017 year. It is expected the office and industrial-focused REITs will produce solid results due to low vacancy rates, while the retail landlords will be more subdued with their tenants feeling the pressure of flat sales.

The hotel sector is also emerging as one of the more active as a swath of new developments and listings hit the market.

Investors are favouring bricks and mortar assets, as they provide stronger yields and sharper compression than leaving money in a cash account.

The 2016/17 Capital Markets Investment Review by Colliers International reveals that offshore capital continues to flow into the Australian commercial marketplace, primarily targeting CBD office assets along the eastern seaboard, particularly in Sydney and Melbourne.

Investment across the office, retail, industrial and hotel sectors reached $28.99 billion, with $8.19 billion of those sales attributed to foreign buyers.

Yield compression in each asset class will continue throughout the financial year ending 2017, with limited stock creating competitive tension between investors and driving record prices.

According to the reports, NSW and Victoria are experiencing heightened demand for investment assets on the back of infrastructure development, population growth, rising rental rates and tightening yields.

Colliers International’s managing director of capital markets and investment services, John Marasco, said the strong demand conditions, as well as increased investment in infrastructure, had opened up opportunities for some of Australia’s premier developers to build the next generation of commercial assets.

“These development hot spots in Sydney and Melbourne will cement these cities’ reputations as globally competitive for both capital and tenants, and meet not only the current but also the future needs of occupants,” he said.

The lion’s share of 2016/17 investment sales was recorded in NSW, where combined investment across office, retail, industrial and hotel sectors totalled $12.51 billion.

These are key positive attributes for office markets, with both trends felt most keenly in Sydney and Melbourne.

According to Colliers International, the total transactional value for the 2017 financial year was $13.2 billion, with about 75 per cent of sales taking place in NSW and Victoria and offshore investors making 44.9 per cent of purchases.

Mr Marasco said it was important to note the impact population growth in Australia’s capital cities was having on transaction volumes, with the country growing by 1.89 million people between the 2011 and 2016 census.

The attraction for the cash is office markets riding a wave of high demand a low supply.

Jenine Cranston, senior director, office leasing at CBRE said regarding deals, the firm tracked an 18 per cent improvement in activity compared with the same period last year.

“We have also witnessed a 10 per cent fall in A- and B-grade incentives, from 33 per cent to 23 per cent in A-grade stock and from 31 per cent to 21 per cent in the B-grade sector,” Ms Cranston said.

“The B-grade stock accounted for about half of CBRE’s transactions in the first half of the year off the back of strong Sydney metro-related activity and stock withdrawals. While we are seeing rental growth slow following a very strong 2016, the trend of contracting incentives means that net effective rentals will continue to fare well.”

Hotel sector

One of the busiest sectors has been in hotels, with the Seasons Harbour Plaza Sydney at 252 Sussex Street for sale following a unanimous agreement by the Owners Corporation.

As the first hotel asset to be offered in Sydney under changes to the Strata Schemes Management Act, 252 Sussex Street represents a unique opportunity. It is among only a handful of hotels to be offered for sale in recent years.

Price expectations exceed $70 million. The hotel is operated under a lease agreement with Seasons Apartment Hotel Group, however vacant possession is available to the buyer.

Gus Moors, head of hotels, Colliers International, said  the Seasons Harbour Plaza Sydney’s “prime central CBD location within walking distance to public transport, entertainment districts and the new International Convention Centre, means we expect a high level of interest from domestic and international buyers”.

The hotel comprises 119 apartment-size rooms over 19 floors ranging from 30 square metres for a studio to 157 square metres for a loft penthouse apartment, with an average size of 47 square metres.

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