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Duel Dynamics: PERE’s Australia Roundtable 2015

Oct 21, 2015
Managing a well-diversified portfolio with commercial real estate debt

In a relatively small market by world standards, and one where most core assets are securitized, global investors targeting Australia will increasingly need an exclusive calling card to get into its key gateway cities.

They will need to forge a close working relationship with Australia’s largest integrated property groups to access assets from their deal or development pipelines, typically through clubs or joint ventures.

If portfolios of assets are what these institutional investors seek, they will most likely need to partner with one of Australia’s large listed REITs to access prized assets, which more than likely will be locked in public vehicles or wholesale funds.

Increasingly, they will have to look outside the box at alternative asset classes like student accommodation. These leftfield options are rapidly gaining attention and attracting serious investment and finance.
In short, Australia is all about ‘partnership culture’, according to the participants in the 2015 PERE Australia Roundtable held in Sydney in August. The right partners will open the door to opportunities, they say.

They agree that scarcity of supply, coupled with both global and domestic demand, has heightened competition for Australian real estate.
Until recently, Australia was perceived as a market where yields were high and prices were behind those of key global capital cities. Australia offered good value.
That is now changing as capitalization rates compress and yields shrink.

Bruce Wan, Macquarie Group real estate strategist, says: “Sydney and Melbourne have come into the price adjustment cycle fairly late. Australia has only started to see genuine cap rate compression since about 2014.”

“In the global cyclical context, Australia is still a lagging market. Prices move ahead first in Hong Kong and London, the most liquid and the largest markets in the world, followed by, for example, Manhattan and Paris.”

Roundtable participants were struck by what they call the ‘pretty sharp price’ paid for the Morgan Stanley-controlled Investa Property Trust in July. The 20 percent premium paid for the portfolio may well set a new benchmark for core Australian commercial real estate.

“The level of demand for Investa, both in the number of bidders and the quantum of dollars involved, reflects the scarcity value of high-quality core assets,” says Rob Hattersley, chief investment officer of Lend Lease. “There is plenty of capital, but quality deals are limited.”

China Investment Corporation (CIC) bought the Investa portfolio for A$2.45 billion (€1.6 billion; $1.8 billion) on a passing income yield, believed to be in the range of 4.5 per cent to 4.7 per cent.

“Foreign investors are taking foreign pricing into the Australian market,” says Wan, noting that the Investa transaction price is comparable to what is currently paid for office assets of this size and quality overseas.
So far this year, says Wan, there have been just two other office deals globally with a ticket size of more than A$2 billion. Those were done on yields of around 4.5 percent.

Wayne Lasky, founding partner and managing director of MaxCap Group, a Melbourne-based property debt and investment company, says: “The pricing might look sharp if you just look at the transaction alone. You need to understand that relative to other opportunities outside of this country, there aren’t many core assets of this type and of this scale available.”
Michael Weaver, manager of private markets, covering real estate, infrastructure and private equity and private debt with Australia’s A$34-billion Sunsuper, says that even if the premium was steep, it still makes sense for a new investor to the market seeking exposure. Nonetheless, long-term property investors might have been a little surprised at the sharp yield of the transaction, he admits.

Hattersley agrees that investors with more mature programs, which have invested through various cycles, feel less pressure to deploy capital today than those which are new and need to build up scale in Australia. “They are the more visible investors today.”

Roundtable participants say rising valuations are unlikely to derail the strong inflow of foreign capital into Australia. Large institutional investors, like sovereign wealth funds and global pension funds, are lifting their exposure to real estate in key markets, including Australia, where relative to the global market, the yield spread is still attractive. Weaver says that in the current global environment, with bond rates as low as they are, investors look for other income-producing assets. That means property and infrastructure that can be counted on for steady cash flow in a low-growth, uncertain world. But global capital remains discerning, with a disproportionate bias towards key cities in half a dozen developed countries.

Download the full Australian Roundtable Report 2015 here.