Commercial property sales jumped in the third quarter to a two-year high due to the strong Australian dollar and a strong belief among office buyers that low unemployment will continue as the economy recovers, new CB Richard Ellis figures reveal.
CBRE executive director of global research and consulting Kevin Stanley also says the relatively strong economy is attracting a flood of foreign investors seeking stability and transparency compared to flagging European and American markets.
And while DTZ Research director David Green-Morgan says his own firm’s numbers differ somewhat in terms of stock, the figures are a good indicator that commercial property is recovering solidly.
However, there are still issues plaguing investors. Green-Morgan says the biggest problem is that stock is still relatively low and there is a lack of larger properties being put on the market.
“That’s the biggest issue, that there isn’t a huge amount of stock on the market and many of these deals are still being conducted off-market. I’m not sure that’s driving up prices, but certainly vendors are getting the price they are asking for.”
Stanley also points out that pricing has yet to move in any one direction. However, he notes that office rents will continue to rise in Melbourne and Sydney during 2011, and then later on in Brisbane and Perth.
“As a result, the various office markets around the country offer incoming investors a choice in expected returns which haven’t been available since before the 2007 peak in the market. However, if you take just a medium-term view of, say, three years for any office market, you should be seeing values growing in all markets through a combination of income growth and cap rate compression.”
The figures show the volume of properties sold on the direct market came to $2.6 billion, for transactions greater than $5 million each. This represents a 268% increase from the second quarter, and a 75% increase from the third quarter in 2009.
Stanley points out the average taking has been an average of $1.8 billion each quarter over the past nine quarters, and that the September 2010 volume was 70% above average. Office sales dominated, representing 70% of transactions, with Stanley saying the average representation is only 50% in any given quarter.
“However, in the current market this type of stock is ready to sell, with a large number of new office buildings featuring long leases and attractive depreciation benefits available for incoming investors.”
“These properties are typically still held by the developers, who are ready to sell to free up capital to move onto the next project. Many of these buildings are in the Melbourne and Brisbane CBD’s and Fringe areas, which have just come through a major development cycle.”
Major industrial transactions have also increased, although retail property sales have stalled due to a lack of stock.
Foreign investors have continued to flood the market, representing 42% of all purchases, compared to an average representation of about 10-15%. Stanley says the stable economy and transparent governance is assisting
“In addition, investors can still buy at a reasonable discount to pricing of just a few years ago. Perhaps against expectations, the high and rising Australian dollar doesn’t appear to be reducing foreign interest.”
Asian investors dominated the market taking up 56% of all foreign purchases, while South African investors were the second most-active group taking up 21% of all purchases. “Changes to investment exit laws have opened the doors for South African investors to target opportunities in Australia,” he said.
Green-Morgan says the belief that economic growth is “here to stay” is playing a big part in attracting overseas investors.
“Certainly that belief is a big factor and overseas investors are looking for economics that are going to be doing fairly well over the next few years, and looking for countries where they transact quite easily.”
“Our figures are a little higher in terms of the volume of sales, but in terms of the sentiment and direction of the sales movement, it’s all very similar and reinforces that the market is becoming more active.”
Patrick Stafford is a freelance journalist and a former deputy editor of SmartCompany.
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