Demand for Australian commercial property set to be rampant this year

Demand for Australian commercial property, particularly prime assets, is expected to be rampant again this year. Both local institutions and offshore investors have a strong appetite to satisfy, with the only hurdle being a marked shortage of available stock in which to target. This means investors will need to get creative - and they may need to play in a space they’re not traditionally comfortable with.  

Interestingly, the strength of investment demand actually contradicts the current market fundamentals in Australian commercial property, with vacancy rates trending upwards and tenant demand actually weakening, albeit slightly, in recent times.  

Still, those investors and institutions taking a long-term view understand the value of securing prime Australian assets now. The problem is, it’s not as simple as saying “we have $100 million we want to invest”.  

So how do these institutions satisfy their investment appetite for commercial property? How can they secure an interest in prime real estate when existing prime assets are so tightly held and new supply additions are few and far between? How do they recycle their capital?  

It’s going to be tough for institutional investors to get set this year. The need to get creative, to consider new alternatives and to leave their comfort zone is becoming increasingly apparent.  

Last year we saw capital partnering arrangements emerge as a vehicle for investors to satisfy their investment appetites.  

Our research from late last year showed the proportion of capital partnerships to total sales has grown rapidly since the end of the GFC, with 46.4% of transaction volumes recorded in the Australian retail market and the eastern seaboard office markets in 2012 involving a capital partnership.  

When you consider the shortage of available prime stock against the appetite of local institutions and the weight of money aimed at Australian commercial assets from offshore investors, which we quantified as US$16.5 billion as at September 2013, it is clear that offshore investors need to get creative to penetrate the domestic market.  

Hence we expect capital partnership arrangements to become more prevalent in 2014.  

Capital partnerships are one way in which investors may need to compromise their ideal investment scenarios. Another is through investment in REITs as opposed to direct property.  

Owners are awake to the demand for their assets. This means some are in the position to say “if you want to gain access to real estate assets, you need to invest in our funds”. It’s a compromise most investors would prefer not to have to make, but the reality is that it’s one of few avenues available to gain exposure to property.  

Others may even consider diversifying their capabilities to make a foray into development, as a way of creating assets in which they can invest to satisfy their appetite.  

Either way, it’s going to be tough for institutional investors to get set this year. The market can expect a shake up in 2014, and it could well be the major institutions who will be dominating the headlines.

Tony Dixon is director of investment sales for Cushman & Wakefield