offshore investment drivers
TRANSCRIPT
OFFSHORE INVESTMENT DRIVERSMARCH 2016
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.
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.
• 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.
Australia offers relatively higher expected returns compared to other Asian markets, particularly from Sydney and Melbourne.
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.
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.
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.
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.
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.
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.
