Australia: Time to get out?

Some of the biggest foreign investors in Australian real estate are selling. Is the market too hot? Sharon Hayes investigates

It has taken Morgan Stanley Real Estate Investing (MSREI) a year to sell Investa Property Group, the company’s single most expensive investment in Australia, and probably anywhere in the world. After selling Investa’s prime office portfolio to China Investment Corporation for AUD2.45bn (€1.67bn) in August, and the residential landbank to US firm Proprium Capital Partners for about AUD300m in November, Morgan Stanley has only to wrap up the sale of Investa Office Management Holdings to Dexus Property Group.

This remaining business owns the rights to manage the now CIC-owned Investa Property Trust, the unlisted Investa Commercial Office Fund and the listed Investa Office Fund, but its sale has been trickier than selling the physical real estate. The management platform is widely expected to sell for AUD250m.

On the eve of the global financial crisis, Morgan Stanley, flush with US$8.8bn (€8bn) of cash raised for its MSREF VI fund, bought then-listed Investa Property Group at a hefty 56% premium on its net tangible value at 31 December 2006. The acquisition price of AUD6.6bn, including debt, set an unmatched record in the Australian REIT market.

At its peak, MSREI owned assets valued at more than AUD10bn, including troubled real estate investment trusts (REITs), resorts, five-star hotels, retirement villages and commercial real estate debt. It recapitalised, repositioned and turned around these various businesses before selling them.

The sell-off began in late-2014, when Australian real estate markets started to rev up as foreign investors came knocking on the door. As far as can be determined, the total proceeds of Morgan Stanley’s sales should be close to AUD4.5bn. 

For Morgan Stanley, it will bring to a close a decade as a leading foreign player in the Australian market. Its exposure to Australia is now much reduced – it retains an interest in childhood learning centres and a stake in an office building in Perth, Western Australia. 

Other long-term offshore investors are similarly rearranging their deck chairs in Australia. These include Singapore’s sovereign wealth fund GIC, Canada’s Brookfield Asset Management, Germany’s Deka Immobilien and America’s JP Morgan.

Brookfield has brought to the market AUD1.3-1.5bn worth of assets, including stakes in Brookfield Place in Perth and its Southern Cross complex in the heart of Melbourne. Industry sources say Brookfield plans to plough the proceeds from these sales into its billion-dollar Wynyard Place, a mixed-use complex strategically located in the heart of the Sydney central business district. 

Ric Clark, head of the global property arm of Brookfield Asset Management, said at the company’s second-quarter earnings call that the group was capitalising on growing interest from institutional and sovereign wealth funds in real estate to recycle capital.

Another North American investor, JP Morgan, is disposing of assets it acquired when it entered the Australian market post-crisis. One of JP Morgan’s special situation funds bought a retirement business in Australia for a token one dollar, but assumed its debt. JP Morgan brought Morgan Stanley in as a partner to rework the asset, since renamed Retire Australia. Last December, the business sold to New Zealand Super Fund and asset manager Infratil for AUD640m.

Around the same time, JP Morgan finalised the acquisition of Aviva Investors’ Asia-Pacific platform, inheriting a string of assets held in various Australia-focused funds. 

Aviva Investors entered Australia in 2012, assembling a portfolio of seven retail and office buildings valued then at AUD350m. It had agreed with leading Australian property group, Mirvac, to purchase industrial assets valued at AUD400m to seed its Australian Logistics Fund. JP Morgan has now started to wind up these funds, placing the assets on the market. A portfolio of logistics assets valued at about AUD250m is for sale.

German fund manager Deka Immobilien, a long-time investor in Australia that has acquired several assets for its global open-ended mutual property fund, is also marketing its properties. These include the South Wharf Office Tower in Melbourne, acquired in 2010 for €85m. CBRE Global Investors is believed to have begun negotiating to acquire the office building last September.

Deka Immobilien has a Sydney logistics asset on the market at AUD75m. It raised AUD101m in August through selling an office building in Perth, leased to the Australian Taxation Office, to Goldman Sachs and the Perth-based property syndicator, Warrington Property.

A senior executive with a large property group told IPE Real Estate: “When you look at what is being offered for sale, you see that these are core properties with stable incomes. You can’t add value to them. So the owners are selling to investors happy to have established returns and they themselves can deploy the cash, either on development or to acquire under-valued assets for value-adding.”

He adds: “Typically, investors like Morgan Stanley and GIC have reached a point where they figure that returns from Australia may not reach their internal return hurdles from here on. As global investors, they constantly scan world markets for opportunities. They recycle their capital to those parts of the world they believe will deliver better returns.” 

Selling at the peak?

David Harrison, joint managing director of Charter Hall, says: “I don’t think you can say that these investors are selling out at the peak of the market. For some, it is a question of the funds needing to wind down. Their assets have to be sold.”

Industry sources told IPE Real Estate they expect many more properties to come to market either as a portfolio or as single assets as owners look to capture the capital growth that has occurred in the past two years.

It is calculated that the top five portfolios alone that are expected to come to market are worth AUD3.5bn. The single most expensive asset on the market is the AUD2.5bn Collins Square Melbourne.

“We believe that this quantum of assets on the market at the same time will test the depth of the market,” observes the head of research at one of Australia’s largest listed REITs.

Explaining his decision to sell, Lang Walker, owner of Collins Square, said domestic and foreign investors, such as M&G Real Estate and CMIB Trust, both based in Singapore, had made approaches to buy the complex.

“There is plenty of offshore capital looking for Australian assets,” says Harrison, whose trust has sold to both onshore and offshore buyers. 

Industry observers note that many asset owners are putting non-core assets on the market – trying to push the barriers to see what they can achieve.

Harrison said Charter Hall is selling assets that are too small or have leases that are shorter than what it would like in its portfolio. In the past three years, Charter Hall, manager of AUD15.5bn in assets, has sold, on average, AUD1bn in real estate while buying AUD2bn in new properties each year.

“For us, it is really about portfolio construction and funding the development pipeline rather than calling a point in the cycle,” Harrison says. 

Prices for quality assets in Sydney and Melbourne increased by 10% to 15% over the year to October, says Matt Whitby, head of research at Knight Frank. “Undoubtedly, the risk of a market correction has heightened this year. However, we could simply see a flattening in yields in 2016 for core passive assets, albeit with some downward pressure remaining.”

In the past year, foreign investors have been setting the price of commercial real estate in Australia. Harrison says offshore capital seems more competitive than onshore capital. This is borne out by the sale of the Investa and GIC portfolios, which established new pricing benchmarks for Australian commercial real estate. The yield achieved on the Investa portfolio was 5.3%. The GIC logistics portfolio sold at around a 6% yield. Some say there is a premium attached to assets being offered in a single line.

John Marasco, Colliers International’s head of capital markets, is uncertain. “It is unprecedented that these two portfolios were offered to the market in the same year,” he says. “No one knows if the price paid reflects a premium for portfolios or whether they represent the new norm for quality offices and logistics.”

But for sure, he says, quality individual assets are being negotiated at these types of yields. Sharper prices are not a deterrent to keen buyers. Industry sources say that every week new names from overseas are seeking to enter the Australian market. The level of interest, they say, is unprecedented.

Marasco says that for every asset that comes to market there is a queue of buyers because there is more to it than price when making investment decisions. 

The Australian economy is reasonably strong and the Australian dollar is weaker.

“There is still a record [positive] spread of yield to debt and that is going to continue to drive capital flows,” says Harrison. “In some markets, like Sydney, you are seeing a resurgence in demand, falling vacancies and therefore prospects of rental growth. The market is at an interesting equilibrium.

“The Australian economy is transiting from mining and resources to a broader services base, while a falling dollar is helping stimulate exports. Australia’s unemployment is relatively low at 6%.”

Marasco says: “The Australian market has been very resilient over the past decade. The economy is still tracking well, and we are starting to see business confidence improving, with governments spending on new infrastructure. This will generate growth and even more interest in Australia.”

Whitby says: “Offshore investors made up around 50% of market transactions in 2015 – well up on the 10-year historical average of around 20%. In Sydney, this is even more accentuated, with the proportion of 2014 and 2015 office volumes in the CBD changing hands to offshore groups above 60%.”

He expects offshore groups to remain significant net buyers of office assets, particularly in Sydney and Melbourne, notwithstanding the recent sell-down from select groups. 

“Volumes in 2014 reached record levels, and we remain on track to go close to equalling 2015,” says Whitby. “I am anticipating further large-scale deals in the closing weeks of the year, with on-market and many off-market deals going on in the background.”

The record for commercial real estate transactions in Australia, according to RCA Analytics, was set in 2007 at almost AUD34.5bn. At AUD34bn, activity in 2014 was just half a billion shy of that record.

Marasco says: “With the work in progress in 2015, we should outstrip 2014. And with the stock coming on the market today, we will hit the ground running in the first quarter of 2016.”