Foreign investors have reduced their exposure to Australian commercial property, as higher interest rates and soft returns for office and retail weigh on sentiment.
According to Ray White Commercial, commercial investment volumes have fallen 48.11 per cent in the past 12 months, after growing 45.47 per cent the prior year.
Ray White Commercial, Head of Research, Vanessa Rader said demand for Australian commercial property from offshore groups is down, discouraged by poor occupancy levels, reduced income returns, and weak yield growth.
“Over the last 12 months there has been a large uptick in disposals by foreign investors keeping net acquisition levels limited,” Ms Rader said.
“While transactions continue to occur across these major asset types there has been an uplift in alternative commercial investment classes with an increase in hotel and tourism investment and residential investment, which includes student accommodation and build-to-rent (BTR) assets.
“This move away from core commercial investment is indicative of the limited confidence across these asset classes which have seen reduced capital returns.”
She said there had been an uptick in investment coming from Japan, with investors favouring office and BTR options, totalling $14 billion.
“The United States remains the most active country for investment, accounting for 34.5 billion, however, has shown a significant 70.98 per cent decline in activity from last year,” she said.
“Similarly, Canadian investment is down 54.29 per cent to $14.4 billion, with industrial, suburban office, as well as development projects including BTR in the Sydney and Melbourne markets where investment is dominated.”
Ms Rader said China increased its investment to $9.5 billion, after capitalising on strong value growth in the 2021/22 financial year where disposals increased.
“Volumes this year are up more than 100 per cent and are anticipated to continue to grow, with opportunistic groups looking to capitalise on changing market conditions and rising investment yields,” she said.
“Similarly, Korean investment has also grown by close to 50 per cent with increased exposure into the industrial and office sectors.”
Looking ahead, Ms Rader said a combination of a softer Australian dollar and improved affordability for many asset types will likely encourage investment by offshore groups.
“Historically, Australia and its “safe haven” status has kept interest levels high in commercial assets which is not expected to waver,” she said.
“Interest in development opportunities will continue particularly given the underlying housing demand shortage, with BTR and student accommodation expected to aid in this regard.
“While the trophy nature of office assets will continue to see buyers look toward these opportunities, their revaluation in a low occupancy environment will need to take place.”