Australian commercial property has seen foreign investment accelerate in recent years, making up 43% of total investment. Foreign investors with lower required return expectations relative to domestic investors have pushed yields down to historically low levels despite. Will this continue into 2016 and beyond?

1. OFFSHORE INVESTMENT DRIVERS
MARCH 2016

2. Foreign investment into Australian
commercial property has accelerated over
the past few years from $2.9bn in 2012 to
$12.7bn in 2015, making up 43% of total
investment.

3. Foreign investors with lower
required return expectations
relative to domestic investors
have pushed yields down to
historically low levels despite
what up until recently has
been a period of lacklustre
rental growth across most
sectors and markets.

4. • The rising share of offshore investment has been
accompanied by falling yields given that in most
cases, offshore investors have lower required
returns relative to domestic investors.
• While this dynamic is likely to persist, low interest
rates have largely run their course in terms of
influencing yield compression.
• Investors will now look to rental growth
fundamentals, income certainty and even
marginal drivers like tax treatment as sources of
competitive return.

5. Australia offers relatively higher expected returns compared to other
Asian markets, particularly from Sydney and Melbourne.

6. Foreign investment into Australian
commercial property has accelerated over
the past few years from $2.9bn in 2012 to
$12.7bn in 2015, making up 43% of total
investment.
This should encourage further capital attraction
from the Asian region in 2016, which is supported by the
CBRE Asia Pacific Investor Intentions Survey which
ranks Australia as the most attractive market in Asia Pacific.

7. Australia has one of the lowest taxation
rates for investors that use
Managed Investment Trusts (MIT).
MITs were introduced to Australia in 2007
and are relatively more tax effective
compared to a company or standard REIT
structure.

8. Foreign investors with lower
required return expectations
relative to domestic investors
have pushed yields down to
historically low levels despite
what up until recently has
been a period of lacklustre
rental growth across most
sectors and markets over
the past two years.
If an investor from an
Exchange of Information (EOI)
country uses a MIT to
purchase a commercial
building in Australia, the
income tax can be as
low as 10%.
This is far lower that tax levied
on domestic investors that
purchase commercial
property.

9. Foreign investors with lower
required return expectations
relative to domestic investors
have pushed yields down to
historically low levels despite
what up until recently has
been a period of lacklustre
rental growth across most
sectors and markets over
the past two years.
If an investor from an
Exchange of Information (EOI)
country uses a MIT to
purchase a commercial
building in Australia, the
income tax can be as
low as 10%.
This is far lower that tax levied
on domestic investors that
purchase commercial
property.
If the current low growth environment persists,
Australia’s comparative advantage – higher yields,
tax effectiveness relative to its peers, and
better income growth prospects – are compelling
reasons for a continuation of the foreign investment
seen over the past two years.

10. Foreign investors with lower
required return expectations
relative to domestic investors
have pushed yields down to
historically low levels despite
what up until recently has
been a period of lacklustre
rental growth across most
sectors and markets over
the past two years.
If an investor from an
Exchange of Information (EOI)
country uses a MIT to
purchase a commercial
building in Australia, the
income tax can be as
low as 10%.
This is far lower that tax levied
on domestic investors that
purchase commercial
property.
If the current low growth environment persists,
Australia’s comparative advantage – higher yields,
tax effectiveness relative to its peers, and
better income growth prospects – are compelling
reasons for a continuation of the foreign investment
seen over the past two years.
Key challenges for 2016
The effect of higher interest rates and rising bond yields
observed since the start of 2016 will be at the
forefront of investors’ minds over the next few years.
The rising cost of funding will be an underlying
hindrance for pricing across
all asset classes.

11. Key opportunities for 2016
Relatively attractive commercial property yields
in Australia - even at current levels - are likely to
continue attracting foreign capital.
Strong rental growth prospects, particularly in
Sydney and Melbourne office, may provide some
offset to rising funding cost, which may result in
continued, albeit moderate, yield compression in
H116.
We expect continued levels of foreign investment
with moderate compression in H116 before
potential softening in H216 with the
corresponding rising bond yield environment.

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