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
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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
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-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
Source: ABS, CBRE Research
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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 ($1.1b)
Local investors with mandated hurdle rates are squeezed out of market
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WHAT HAVE WE SEEN IN COMMERCIAL PROPERTY MARKETS ? FOREIGN PURCHASE ACTIVITY HAS INCREASED
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
Sale
s Vo
lum
es ($
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
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FOREIGN INVESTORS HAVE BEEN NET ACQUIRERS OF COMMERCIAL PROPERTY SINCE 2007
Source: CBRE Research
-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
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THE COMPOSITION OF THE ORIGIN OF FOREIGN INVESTORS HAS CHANGED
Source: CBRE Research
EMEA 51%
Americas 17%
APAC 32%
Origin of Foreign Purchaser 2008-2012
EMEA 21%
Americas 21%
APAC 58%
Origin of Foreign Purchaser 2013-2015
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AND THERE IS NOW A VERY DIVERSIFIED MIX OF INVESTORS BY ORIGIN
Source: CBRE Research
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?
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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
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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
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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
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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
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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
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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
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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 $20m
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FOREIGN INVESTMENT IN NEWLY BUILT DWELLINGS HAS RISEN …the most significant market for foreign purchase activity is Melbourne
0
2
4
6
8
10
12
14
16
18
20
NSW VIC QLD WA SA
% o
f offs
hore
pur
chas
ers
FIRB Approvals as % of state all residential turnover
Source: CBRE Research; RP Data; City of Melbourne Council, 2014.
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IMPACT OF FOREIGN INVESTORS ? PRICING GAP BETWEEN NEWLY BUILT RESIDENTIAL AND “RE-SALE” MARKET
Excerpt from recent CBRE Research Viewpoint, Aug 2015 “Foreign investment driving two tiered residential market”
-8
-6
-4
-2
0
2
4
0
2
4
6
8
10
12
2009 2010 2011 2012 2013 2014
Pric
e di
ffere
ntia
l (%
)
Ann
ual v
alue
of F
IRB
app
rova
ls ($
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
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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
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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
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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
Source: CBRE Research
0%
5%
10%
15%
20%
25%
30%
0
2
4
6
8
10
12
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
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CHINESE ONLY AT THE START OF INVESTMENT DIVERSIFICATION
…repeat of Japan looks less likely ?
0
20
40
60
80
100
120
140
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
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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
Source: ABS, CBRE Research
28 CBRE | AUSTRALIAN COMMERCIAL PROPERTY
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
0
2
4
6
8
10
12
14
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
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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
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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
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