capital attraction: the rise of australia as an … · “housing bubble” myth?: rising levels of...

CAPITAL ATTRACTION: THE RISE OF AUSTRALIA AS AN INVESTMENT DESTINATION 8th September Stephen McNabb - Head of Research, Australia

Prepared for: UNSW Real Estate Symposium 2015

2 CBRE | AUSTRALIAN COMMERCIAL PROPERTY

Observations on capital flows to Australia

What’s attractive about Australia ?

Offshore investment into residential real estate

TODAY’S PRESENTATION

Cross border capital flows outlook and implications

OBSERVATIONS ON CAPITAL FLOWS TO AUSTRALIA


A FEW BASICS - AUSTRALIA IS A CAPITAL IMPORTING COUNTRY

10%

15%

20%

25%

30%

35%

80 82 83 84 86 87 88 90 91 92 94 95 96 98 99 00 02 03 04 06 07 08 10 11 12 14 15

Domestic Saving and Investment as % of GDP

Domestic Savings Domestic Investment

Mining investment boom

Domestic savings rise post "GFC"

-6%-3%0%3%6%9%

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

Foreign Capital Requirement % of GDP Qu: What happens when Australia requires less capital but demand for assets is strong ?

Source: ABS, CBRE Research


-150%

-100%

-50%

0%

50%

100%

150%

200%

250%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Foreign assets and liabilities as a proportion of GDP

Foreign Assets Net position Foreign liabilities

GLOBALISATION IN ACTION – RISING FOREIGN ASSET AND LIABILITY POSITION BUT NO PRESSURE ON THE OVERALL BALANCE

Overall external position is fairly balanced relative to GDP so every dollar in equals a dollar out



GLOBALISATION – LOCAL ALLOCATIONS TO OFFSHORE HAVE RISEN

0%

5%

10%

15%

20%

25%

1988 1991 1994 1997 2000 2003 2006 2009 2012 2015

Offshore Allocation across all Managed Funds in Australia All asset classes

Source: ABS

Implication for Australia’s property markets: Domestic investors looking to diversify offshore • AustSuper acquisition of

share in Hawaiian shopping centre ($1.1b)

Local investors with mandated hurdle rates are squeezed out of market


WHAT HAVE WE SEEN IN COMMERCIAL PROPERTY MARKETS ? FOREIGN PURCHASE ACTIVITY HAS INCREASED

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Sale

s Vo

lum

es ($

m)

Commercial Property Transaction Activity – by purchaser origin

Foreign Domestic

The key question is whether this represented a shift in the net position or just more globalisation (rising cross border flows in both directions)

Source: CBRE Research

Presenter

Presentation Notes

5% of global commercial real estate turnover ($27b in 2014) – Aust is <2% of world economy) $6b of new foreign acquisitions in 2014 (slightly ahead of 2013) with 2/3rds from Asia. Foreign capital generally looking for income stability attracted by Australia’s high yields (e.g. Sydney has a 250bp premium to HK, Sing and 150-200bp premium to London) Acceleration in site sales for residential development opportunity Australia ranked number 3 in APAC (based on CBRE Survey of APAC Investor Intentions) as destination for foreign capital (2nd in 2014)


FOREIGN INVESTORS HAVE BEEN NET ACQUIRERS OF COMMERCIAL PROPERTY SINCE 2007


-3

0

3

6

9

12

15

18

21

24

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

AUD

Bill

ion

Foreign Net Commercial Property Purchases - Cumulative position since 2005

Retail Industrial Office


THE COMPOSITION OF THE ORIGIN OF FOREIGN INVESTORS HAS CHANGED


EMEA 51%

Americas 17%

APAC 32%

Origin of Foreign Purchaser 2008-2012

EMEA 21%

Americas 21%

APAC 58%

Origin of Foreign Purchaser 2013-2015


AND THERE IS NOW A VERY DIVERSIFIED MIX OF INVESTORS BY ORIGIN


Investment into Australia over the last 7 years led by Singapore… • China overtook Singapore as source

of capital in 1H 2015 and moves further ahead…Investa portfolio ~$2.4bn

• Total foreign purchases from 2007 to YTD-2015 = ~21% of total (but 33% in 2015)

USA 14%

China 18%

Singapore 21% Korea

5%

Malaysia 6%

Germany 11%

United Kingdom

4%

Canada 3%

All others 18%

Origin of Foreign Investor 2007-2015

WHAT’S ATTRACTIVE ABOUT AUSTRALIA?


HIGHER ECONOMIC GROWTH, INTEREST RATES AND YIELD SUPPORTED CAPITAL FLOW TO AUSTRALIA

• Higher growth/rates and yield structure

• Lower risk: AAA-rated sovereign

• Banks/Financial system lower risk; capitalised and credit risk managed

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

Asia US Aust Europe

Global Commercial Office Yields - Regional Averages

Yield Spread to bondSource: CBRE Research


WIDE SPREADS TO BOND DON’T, BY THEMSELVES, MEAN GOOD VALUE BUT THEY AT LEAST MEAN FAIR PRICING Property and equity looks fair value compared to bond rates

-15%

-10%

-5%

0%

5%

10%

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014Spre

ad b

etw

een

yiel

d an

d bo

nd

Asset Yields to 10 year bond spread

Gross dividend yield (ASX) Sydney Prime office to Bond

Assets priced off growth have seen yields widen relative to bonds i.e. more “return” has to be delivered from yield rather than growth. Hence, equities have corrected the most. Property/equities look fair on this basis

Low inflation/lower growth High inflation/high growth

Low inflation/high growth

Source: RBA, CBRE Research


RISING CONSUMPTION/INCOME PER CAPITA MADE AUSTRALIA ATTRACTIVE TO BUSINESS AS WELL Strong relative performance…

• Australia’s population growth

of 1.7% over last decade - 0.6% Advanced world economies; 1.0% Asia-Pacific

• Consumption per capita average growth of 4% in last 10 years v 2-2.7% in US/Europe/UK

• Over 40 foreign brands opened retail stores in Australia in 2014 (and 11in 2015 to date)

80

100

120

140

160

180

200

220

240

260

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Ind

ex: 1

00

Consumption Per Capita Index

Australia Canada U.S. GermanyU.K. China India Japan

China 2024: 450 India 2024: 595

Forecast

Source: CBRE Research; Oxford Economics


MORE THAN JUST INVESTMENT CAPITAL – FOREIGN RETAIL BRAND PENETRATION IS GROWING – STILL SOME WAY TO GO …retailers diversifying globally

0%

10%

20%

30%

40%

50%

60%C

hina

Sin

gapo

re

Hon

g K

ong

Japa

n

Mal

aysi

a

Kor

ea

Taiw

an

Thai

land

Indo

nesi

a

Phi

lippi

nes

Indi

a

Aus

tralia

Vie

tnam

New

Zeal

and

Cam

bodi

a

Foreign Retail Brand Penetration

*Number of foreign retailers operating in a country as identified by CBRE divided by total foreign retailers in APAC region

Source: CBRE Research, August 2015


OFFSHORE INVESTORS CAN SOMETIMES HAVE MISPERCEPTIONS AS WELL

“Australian industrial is underperforming because motor vehicle manufacturing is being shutdown” Myth ?: Fails to see that Motor Vehicle manufacturing represents just 5% of manufacturing (itself only 7% of the economy) or that 85% of vehicles consumed are already imported “Housing bubble” Myth?: Rising levels of building activity, high price to income ratio, prices haven’t fallen like they did in the US/Europe - in some cases these headlines miss the fundamentals of vacancy and rent. “Mining bust” Myth?: Term used loosely, without focus on the subtle difference between an “investment” boom and a “production” boom; often the regional concentration of this activity isn’t well understood.

OFFSHORE INVESTMENT INTO RESIDENTIAL REAL ESTATE


RISING RESIDENTIAL VALUE RELATIVE TO COMMERCIAL APPEARS TO BE DRIVING DEVELOPMENT AND CHANGE OF USE IN SOME MARKETS

Source: CBRE Research, ABS

50

70

90

110

130

150

170

2004 2004 2005 2006 2006 2007 2008 2008 2009 2010 2010 2011 2012 2012 2013 2014 2014 2015

Residential Prices versus Commercial Capital Value Sydney

Sydney Residential Sydney Office Sydney Industrial

Presenter

Presentation Notes

Average per site a lot lower t Particularly for obsolete office and industrial stock in less attractive industrial locations (South Sydney)/Central


FOREIGN INVESTORS ARE PURSUING THESE DEVELOPMENT OPPORTUNITIES

Source: Real Capital Analytics; CBRE

0

20

40

60

80

100

120

140

2012 2013 2014 2015

Num

ber o

f dea

ls

Inner City Development Site Acquisitions (Sydney, Melbourne, Brisbane) year to April

Local Foreign other China

Comprising: • Sydney (37) - average site

price $65m

• Melbourne (52) - average site price $20m

• Brisbane (26) - average site price $20m

Presenter

Presentation Notes

Average per site a lot lower than Sydney. Sydney higher as productive office assets are being purchases


FOREIGN INVESTMENT IN NEWLY BUILT DWELLINGS HAS RISEN …the most significant market for foreign purchase activity is Melbourne

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14

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18

20

NSW VIC QLD WA SA

% o

f offs

hore

pur

chas

ers

FIRB Approvals as % of state all residential turnover

Source: CBRE Research; RP Data; City of Melbourne Council, 2014.


IMPACT OF FOREIGN INVESTORS ? PRICING GAP BETWEEN NEWLY BUILT RESIDENTIAL AND “RE-SALE” MARKET

Excerpt from recent CBRE Research Viewpoint, Aug 2015 “Foreign investment driving two tiered residential market”

-8

-6

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-2

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2009 2010 2011 2012 2013 2014

Pric

e di

ffere

ntia

l (%

)

Ann

ual v

alue

of F

IRB

app

rova

ls ($

b.)

Pricing Differential between New and "Re-sale" Market – Melbourne Residential

Differential new versus resale (RHS) FIRB value of residential for development (LHS)

Source: CBRE Research; RP Data City of Melbourne Council, 2014.

CROSS BORDER CAPITAL FLOWS OUTLOOK AND IMPLICATIONS


INTENTION TO INVEST ACROSS BORDERS HAS RISEN – AUSTRALIA ATTRACTING A LARGE SHARE

Source: CBRE Global Investor Intentions Survey 2015, % of survey respondents

Cross–region investment intention by origin % of survey respondents

Cross–region investment - preferred destination


WHERE IS THE CAPITAL ? FUNDING SOURCES FROM ASIA AND THE MIDDLE EAST ARE GROWING Excerpt from CBRE Research “ In and Out – Middle East” August 2015


In 1H 2015, Australia attracted over 25% of China’s real estate investment dollar

CHINESE CAPITAL FLOWING INTO GLOBAL REAL ESTATE MARKETS HAS ALMOST TRIPLED SINCE 2012


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0

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4

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2008 2009 2010 2011 2012 2013 2014 2015 1H

USD

Bill

ion

Chinese Capital into Global Real Estate

Chinese Capital to Australia Chinese Capital to Rest of World % to Australia

Presenter

Presentation Notes

Longer term development of the China-Australia relationship suggests a degree of stability for capital already in Australia Chinese capital diversifying to global markets; domestic risks abound and regulatory liberalisation is freeing up more investment capital to be released into global markets Residential investment in Australia less risky given market balance Australia does compete for capital in a global market – but risk of capital retrenchment appears low in absence of significantly adverse economic conditions in Australia or China


CHINESE ONLY AT THE START OF INVESTMENT DIVERSIFICATION

…repeat of Japan looks less likely ?

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60

80

100

120

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160

180

200

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

$b

Foreign Investment in Australia - Japan and China

China investment Japan investment

Japanese investment halted after 1990 during the “lost decade”

Major sectors Mining Manufacturing

Major sectors Mining Real estate (almost 50%)

50% of Japanese investment into real estate

Source: FIRB, ABS, CBRE Research


CHINESE CAPITAL – BACKED BY PEOPLE (AND BI-LATERAL TRADE)!

0

5,000

10,000

15,000

20,000

25,000

NZ UK Philippines China India

Volu

me

of M

igra

nts

per a

nnum

Sources of Migrants - Australia

Ave (1991-2000) Ave (2001-2010) 2014

1

1

3 2

2

4

5

1 2

6 6 3

3 4

7


Presenter

Presentation Notes

Longer term development of the China-Australia relationship suggests a degree of stability for capital already in Australia Bilateral trade Foreign students (no 2 source) Permanent migration Chinese capital diversifying to global markets; domestic risks abound and regulatory liberalisation is freeing up more capital into global markets Residential investment in Australia less risky given market balance Australia does compete for capital in a global market – but risk of capital retrenchment appears low in absence of significantly adverse economic conditions in Australia or China


0%

1%

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5%

6%

7%

8%

9%

10%

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16

Insurance Pension SWF Total

US

$ bi

llion

AUM % of allocation by APAC

MORE CAPITAL EXPECTED TO BE ALLOCATED TO REAL ESTATE WHICH IS UNDERWEIGHT AMONGST APAC INVESTOR GROUPS

Source: Preqin, OECD, SWF Institute, and Various Central Banks and Insurance Associations, ANREV - The increasing importance of Real Estate in Asian pension funds; CBRE – Insurance Paper

APAC institutional investor AUM and allocation to real estate, as at end 2014

% of allocation to Real Estate by developed markets

Presenter

Presentation Notes

Institutional investors: Ever growing assets under management and corresponding influence on global RE markets. Preqin: However, despite the negative impact of oil prices on some sovereign wealth funds’ assets, since October 2013, 59% of sovereign wealth funds tracked by Preqin have accumulated additional assets under management. 59% of SWF had investment into RE Need to find asset growth ? (by market and separate three investment types) Insurance accounts for how many percentage of world?


FOREIGN INVESTMENT ADDS AN UNKNOWN TO TRADITIONAL ANALYSES OF “DOMESTIC REQUIRED RETURNS”

2%

3%

4%

5%

6%

7%

8%

9%

10%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Sydney CBD Required Return and Yield – Traditional analysis

Sydney CBD Prime required return Sydney Prime Yield 10 year bond yield

Risk premium

Implied* growth

*”Implied” growth is derived from the difference between IRR and observed market yields

As foreign investors have a greater influence on the market; we may need to look beyond purely domestic fundamentals Implication: Creates a little less certainty about predicting the required return as need to factor in international expectation for return

Source: RBA, CBRE Research

Presenter

Presentation Notes

00-07 08-15 15 15-21 IRR determined by: Bond yield 5.6% 4.4% 3.1% 4.6% Risk premium 3.1% 4.1% 4.8% 3.5% IRR 8.8% 8.5% 7.9% 8.1% IRR delivered by: Property yield 6.3% 6.5% 5.8% 6.0% Implied* growth 2.5% 2.0% 2.1% 2.1%


KEY POINTS IN CONCLUSION

1. Globalisation – Australia receiving a share of rising cross border activity 2. Relative performance of Australian economy and markets

• more cyclical - Australia currently receiving an above weight share of investment interest 3. New capital sources are growing and diversifying

• Australian funds also look offshore

• Implication for local investment returns

8th September 2015

Disclaimer: Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE.

capital attraction: the rise of australia as an … · “housing bubble” myth?: rising levels of...

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