Australia Seen Luring Global Property Funds

Source : The Business Times, September 18, 2008

Middle East, German investors seeking out deals in commercial property market

(SYDNEY) With US$12 billion of commercial buildings up for grabs and its currency weakening, Australia is becoming a prime target for global funds keen to snap up bargains offloaded by troubled property trusts.

Attractive opportunities: A weakening Australian currency and expected further cuts in interest rates are enticing many overseas investors

The Australian commercial property market, long dominated by local players, has held its value because of low vacancy rates. But highly leveraged real estate investment trusts are in trouble because the global credit crunch has raised borrowing costs.

Cashed-up Middle East investors and German funds with low-risk, low-return expectations are sniffing out deals, says Robert White, president of New York-based research firm Real Capital Analytics.

'A lot of investors want to invest in Asia Pacific for allocation reasons but they're scared of China, and there are limited opportunities in other markets,' he said. 'So Australia has emerged as a very attractive market for Germans, for Middle East investors.'

Australian developer Ashington said earlier this month that it was seeking foreign investors to stump up a A$200 million (S$228 million) fund to buy buildings during what it believes will be a short window in 2009 for bargain hunting.

And Abu Dhabi Investment Authority, the world's largest sovereign wealth fund, wants to expand its property portfolio in Australia, according to UAE newspaper reports. About A$15 billion worth of assets are up for sale in Australia, according to consultants DTZ. And Australian property firms, which have traditionally relied on superannuation pension funds, are also looking to partner foreign funds to broaden their capital base.

The global credit crunch has hit Australian property firms hard, especially Reits, which are now looking to raise funds to cut their borrowing levels after debt spreads more than doubled in the last six months to about 110 basis points.

The refinancing problems of shopping mall operator Centro Properties Group and Allco Finance Group Ltd have hogged the headlines, but the whole stockmarket sector has been dragged down about 40 per cent since October.

Macquarie Office Trust said during the full year to June that it made asset sales totalling A$340 million while GPT Group plans to sell holiday resorts.

A fall in the currency and expected further cuts in interest rates are enticing many investors, said Jane Murray, Asia-Pacific head of research for Jones Lang LaSalle The Australian dollar has fallen about 18 per cent against the US dollar since a peak in July on expectations that global economic turmoil will drag down commodity prices and prompt interest rate cuts.

'It may not be a long-term phenomenon because obviously the Australian market will recover,' Ms Murray said. 'But over the next year or even two years, we will see many more purchases done by international players.'

In 2007, overseas investors spent about A$15 billion on Australian commercial property - half of total transactions - with a slew of highly leveraged deals before the credit crunch hit.

So far this year the going has been slow, according to DTZ, with foreign investors spending A$1.5 billion, or about 21 per cent of the total recorded up to the end of August. Market fundamentals still look solid as a mining boom has brought office vacancy rates down to an average 4.2 per cent across the country. Office yields are also high at 7 per cent in the first half of 2008, compared with 6.7 per cent in the United States, 5.2 per cent in Singapore and 4.7 per cent in Japan.

But some funds see better value elsewhere. Henry Chin, a strategist at Deutsche Bank's property investment arm RREEF, said a clampdown on bank lending was hampering growth in Australian property.

He prefers China and South Korea, where office vacancy rates are below 2 per cent and new supply is tight.

But although global funds are drawn to high growth markets such as China and India, many conclude that Australia offers the best returns compared to risk, according to Alistair Meadows, a director at DTZ.

'After six to 12 months of looking hard into these markets, they fall back to a default position and look at Australia as offering good transparency,' Mr Meadows said.

Australia, where nearly 70 per cent of investment-grade buildings are securitised, ranks second in the world for property market transparency, behind Canada, according to a Jones Lang LaSalle index. Japan comes in at 26 on the list, with China's main cities at 49 and India at 50. -- Reuters