US property on the nose – JLL

AUSTRALIAN investors have shifted their focus away from the United States towards Asia Pacific assets in Japan and Singapore, according to Jones Lang LaSalle's latest Global Capital Flows report.

Australian investors continued to be particularly active on the global property investment stage over the first half of 2007, placing $US4.1 billion in direct cross-border property investment.

“With an exceptional first half performance in each region, global real estate investment for 2007 is likely to surpass 2006 levels, however the current debt market turbulence will result in volumes in the second half being below those achieved in recent years,” according to JLL’s Australia head of research & consulting Kathryn Matthews.

Matthews said that with the credit crunch still working its way through the system, pricing for risk is clearly increasingly returning to investors’ and financier’s agendas. Certainly the Fed’s decision to cut rates last week has helped restore confidence, but was for the most part already factored into the markets and will take time to have any substantial impact on the economy.

“The flip side, however, is inflation is still a concern and what we gain in GDP and market stability today, maybe offset by higher inflation and a rise in interest rates down the road.

“Over the next several months we expect a return to healthier liquidity levels once the current paper pipeline is further digested as the fundamentals in real estate remain strong. There is liquidity out there and there are plenty of active investors in the market. At this stage, we’re seeing more of an over-reaction, than an overcorrection,” she added.

JLL Research shows that by far the largest share of capital flows from Australia was placed in Japan (23%) and Singapore (9%), while less than 4% was placed in US assets.

“This is in stark contrast to first half of 2006, when the US accounted for over 26% of direct investment and Japan and Singapore accounted for insignificant proportions of Australian investment,” she said.

Matthews added that Japan, in particular, has enjoyed increased interest from all investors and not just Australians.

“After an extraordinarily long time in the doldrums, the recent recovery of the Japanese economy and very attractive yield spreads over financing costs have made investors bullish about potential future returns,” she added.

Matthews noted Australia’s direct property investment in the first half of 2007 was actually 20% lower than the first half of 2006 ($US5.1 billion), but contended that this needs to be interpreted in conjunction with a corresponding increase in entity level transactions (corporate takeovers) that are not counted in these figures.

“With yields at very low levels and competition for individual assets intense, Australian Listed Property Trusts have found it easier to increase their funds under management via corporate acquisition, particularly in Europe,” she said.

Examples include Macquarie Goodman acquiring Rosemound, Stockland taking control of Halladale, GPT taking over Halverton and Valad acquiring Scarborough Property Holdings, including a majority stake in Teesland IOG.

The report also reveals a significant increase in cross-border investment in Australia, which is unusual given that the market has traditionally been tightly held by domestic players. According to the research, in the first half of 2007 there was $US1.3 billion invested in Australian by foreign entities in nine major transactions. This compares to just $US0.3 billion in first half of 2006 and $US0.9 billion over the whole of 2006.

JLL’s Australian head of capital markets, John Talbot added that overseas investors have been particularly active in the Australian market in recent months. The story was largely about German investors for quite some time, but the diversity of offshore interest is now much broader. German investors are still actively looking for opportunities but so too are other investors from Europe, Asia and the Middle East.

“In the first half of 2006 global investor GE Capital was largely responsible for most foreign transactions, while German funds SachenFonds and Real I.S. dominated transactions over the remainder of 2006. However, in 2007 the mix of investors has become more diverse, including investors from Singapore, Germany, the US, the UK and the global investor GE Capital,” he said.

The report reveals major investments in Australia from foreign interests included Singapore’s GIC purchasing Westfield Parramatta for $US596 million and Singapore’s Tuan Sing Group purchasing the Grand Hotel portfolio for $US280 million.

“Australian real estate has been delivering stellar returns for investors over the last few years – a fact that does not go unnoticed by global investment groups,” Talbot said. “Australia is a very attractive investment destination for global investors seeking exposure to a transparent and sophisticated market in the rapidly growing Asia Pacific region.”

Talbot believes that the level of interest by offshore groups in Australian assets appears set to continue.

“Australia has just had two substantial deals in the second and third quarter of 2007 including LaSalle Investment’s purchase of 50% of Westfield’s Doncaster in Melbourne. Looking forward, we are also seeing significant offshore interest in the prime Central Plaza building in Brisbane,” he concluded.

Australian Property Journal