Q Investment MarketBeat. Australia. Contents. Author. Contacts

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1 Investment MarketBeat Q4 216 Australia 9/1/217 Contents Investment volume 2 Investor type 3 Foreign investment activity 3 Investment by location 5 Outlook 5 Author Dominic Brown Head of Research, Australia & New +61 () dominic.brown@cushwake.com The Australian commercial real estate investment market ended 216 on a strong note, recording a total investment volume of $9.7bn over the fourth quarter. In annualised terms, investment volume in 216 reached $3.1bn to marginally exceed the $29.9bn recorded in 215. While office remained the most liquid sector, investment was down year-on-year in absolute and relative terms at $13.3bn (44%) in 216 compared to $14.9bn in 215 (5%). In contrast, there was 7% y-o-y improvement in the industrial sector, increasing from $3.1bn in 215 to $5.2bn in 216. There was a modest decline (1%) in retail investment as assets became more tightly held, with $7.4bn was invested in the sector in 216 (Figure 1). In what has been an enduring trend for 216, private vehicles (mainly comprising unlisted funds and investment managers) ended the year as the largest net purchasers at $6.3bn. On the other side of the leger, A-REITs ended the year $3.8bn in the red. Much of this has been through announced sales of non-core assets to recycle capital. Foreign investors accounted for $12.1bn of the overall volume. Although this was down 2% y-o-y, international investors (those with a global platform) nearly doubled their investment volume from $2.5bn to $4.5bn in 215 and 216 respectively. Despite a potentially more challenging global landscape in 217, the outlook for the Australian commercial real investment market remains positive. Although there is likely to be upwards pressure on Australian government bond yields, the spreads to Australian commercial property yields still look attractive, especially when compared to other international property markets. This, together with the considerable amount of capital that remains to be deployed, should sustain investment volume in 217. Investors will continue to seek core assets, though given recent trends, landlords may be unwilling to release these assets. Therefore, we expect to see further geographical and sectoral diversification. Metropolitan Sydney and Brisbane CBD office markets are likely to be key targets. Outside of the office sector, quality retail and industrial assets will remain in demand. Figure 1 Total real estate investment purchasing activity by sector (AUDbn) Contacts John Sears National Director, Research +61 () john.sears@cushwake.com Other Industrial 15 James Quigley Head of Capital Markets, Australia & 1 New () james.quigley@cushwake.com Retail Office cushmanwakefield.com INVESTMENT MARKETBEAT 1

2 Australia Q4 216 Investment volume Year ends on a high with largest quarterly volume in 216. The Australian commercial real estate investment market ended 216 on a strong note, recording a total investment volume of $9.7bn over the fourth quarter. This was the largest quarterly investment volume of the year which saw volumes steadily, but consistently, increase quarter-on-quarter (q-o-q) from a low of $4.5bn in Q1 216 (Figure 2). In annualised terms, investment volume in 216 reached $3.1bn to marginally exceed the $29.9bn recorded in 215. While this is shy of the $34.7bn recorded in 214, it remains well above the levels recorded in the period, which averaged $17.5bn. While the overall volume increased by less than 1% year-onyear (y-o-y), the number of deals increased by 25% from a little under 5 transactions in 215 to almost 625 in 216. As a result, average deal size declined y-o-y from $6m to $48m. However this is not to say that there have not been significant transactions. Indeed, one of the main differentiators between the two years has been at the upper end of the price spectrum. In 215 there was $4.8bn invested in deals over $1bn (CIC and Australand portfolios), while none were recorded in 216. Rather in 216, deal activity was much more focussed in the $5m-$1bn range at $4.5bn, compared to $635m in 215 (Figure 3). While office remained the most liquid sector, investment was marginally down year-on-year in absolute and relative terms at $13.3bn (44%) in 216 compared to $14.9bn in 215 (5%) (Figure 4). There was a strong finish to the year, recording $4.9bn in investment volume in Q4, with AMP selling its headquarters at 33 Alfred Street in Sydney CBD to two of its unlisted funds for $445m. ADIA also divested its one-third stake in 111 Eagle Street in Brisbane CBD to GPT s Wholesale Office Fund for a little over $284m. Furthermore, Lendlease secured Ping An (5%) and Mitsubishi Estates Asia (3%) as capital partners for its Circular Quay Tower project in Sydney. In contrast, the decline in office investment was accounted for by a pick-up of 7% y-o-y in the industrial sector. In 216 a total of $5.2bn was invested in industrial assets compared to $3.1bn in 215. This was not only aided by two portfolio sales by Goodman to Blackstone in the second half of the year totalling almost $1.1bn, but also by an 8% increase in the total number of transactions recorded for the year. This has been an evolving trend over the past couple of years, where investors have diversified out of a tightening office sector into sectors with greater opportunities initially into retail and then subsequently to industrial. In line with the above, there was a modest decline in retail investment as assets became more tightly held. A total of $7.4bn was invested in the sector in 216, following $8.2bn in 215. While much of the liquidity was provided by smaller retail centres, there have been some larger sales over the year, with the purchase of Westfield Woden by Perron Investments from GPT s Wholesale Shopping centre fund for $335 being the largest in Q Figure 2 Total real estate investment purchasing activity (AUDbn) Figure 3 Total purchasing activity by lot size (AUDm) 1% 8% 6% 4% 2% Figure Total purchasing activity by sector (AUDbn) % Q4 215 Q1 216 Q2 216 Q3 216 Q4 216 Under 2m 2-5m 5-1m 1-2m 2-5m 5-1,m 1bn+ Average deal size (RHS) Office Retail Industrial Other Q4 Q3 Q2 Q cushmanwakefield.com INVESTMENT MARKETBEAT 2

3 Australia Q4 216 Investor type Unlisted funds and investment managers have been the most active purchasers In what has been an enduring trend for 216, private vehicles (mainly comprising unlisted funds and investment managers) ended the year as the largest net purchasers. Net purchasing activity by these investors was recorded at $1.9bn in Q4 216 to bring the annual total to $6.3bn, well ahead of all other investor types which largely ended the year in neutral or negative territory. This is largely been the result of significant capital raisings and investment mandates which have driven investment activity and Q4 216 was no exception with Invesco, Hines, AEW and Lendlease s APPF amongst others, all active purchasers (Table 1). On the other side of the leger, A-REITs have consistently ended every quarter of the year as net sellers, to end the year $3.8bn in the red following further net divestment of $67m in Q4. Much of this has been through announced sales of noncore assets, such as the sales undertaken by Vicinity and Goodman, to recycle capital for investment into development opportunities. GDI also started exiting from assets having completed their asset management strategies, including the sale of 25 Grenfell Street in Adelaide for $125m to Credit Suisse and the recent sale of 37 Queen Street to LaSalle Investment Management for $142m, though the latter remains subject FIRB approval. Outside of this, net activity has been more muted, though corporates continue to undertake sale and leaseback activity leading to net divestment over the year of $1.7bn. Many of these assets were acquired by unlisted funds and private investors due to their smaller lot size. While foreign investment was down on the previous year nationally, Victoria managed to record y-o-y gains of almost $4m (12%). This was most pronounced in the retail/mixeduse sector, which offset some decline in office investment. National (Australia-wide) portfolios continued to attract overseas interest, though with smaller portfolios being brought to market, investment volume declined in 216. Most activity was involved with the Goodman sales, though ADIA selling 15 IBIS hotels to Accor and Blackstone acquiring retail centres from Vicinity helped drive the annual figure of $2.2bn. Figure 5 Net purchasing activity by investor type (AUDm), 216 8, 6, 4, 2, -2, -4, -6, A-REITS Other Listed Vehicles Private Vehicles Private Institution Investor Public Sector Figure 6 Domestic vs. foreign purchasing activity (AUDbn) Corporate 8% 6% Foreign investment activity Geographical and sectoral diversification in foreign investment activity The momentum in foreign investment that started in Q3 216 continued into Q4, with a further $3.4bn committed (35%) to bring the annual total to $12.1bn approximately 2% down y- o-y. Primarily this was due to a slow start to the year, as only $3.7bn was invested by foreign entities in H While investors originating from Asia Pacific, predominantly China and Singapore, continue to dominate, there have been some appreciable changes y-o-y (Figure 7). It is noted that Asia Pacific investors have increased purchasing activity in EMEA and the US, which may account for the decline in Australian volume from $1.bn in 215 to $6.4bn in 216. At the same time, International investors (those with a global platform) have almost doubled their investment volume from $2.5bn to $4.5bn, no doubt reflecting the net purchasing activity of investment managers highlighted above. Foreign investors continue to target the large, mature markets of Sydney and Melbourne (Map 1). Interestingly investment in NSW offices increased 1% y-o-y, which was mainly achieved through diversifying into Sydney s metropolitan markets Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q Figure 7 Foreign investment by source of capital (AUDbn) Domestic Foreign % Foreign APAC International Americas EMEA % 2% % cushmanwakefield.com INVESTMENT MARKETBEAT 3

4 Australia Q4 216 Map 1 Foreign investment by sector and state/territory, 216 Table 1 Significant investment transactions, Q4 216 PROPERTY TOWN/CITY PURCHASER VENDOR SECTOR PRICE 33 Alfred Street Sydney AMP Capital Diversified Property Fund / AMP Wholesale Office Fund AMP Capital Office $445m Westfield Woden Canberra Perron Investments 39 Martin Place Sydney NSW Government GPT Wholesale Shopping Centre Fund DEXUS / DEXUS Wholesale Office Fund Retail $335m Office $332m 111 Eagle Street Brisbane GPT Wholesale Office Fund Abu Dhabi Investment Authority Office $284m 1 Queen Street Melbourne GPT Wholesale Office Fund ANZ Office $275m Casey Central Narre Warren M&G Investments Scentre Group Retail $22m 55 Clarence Street Sydney AEW Capital Eureka Funds Management Office $17m cushmanwakefield.com INVESTMENT MARKETBEAT 4

5 Australia Q4 216 Investment by location Investment in Victoria surges in 216 While the overall status quo for investment by state/territory continued in 216, it is evident that new sub-national trends are emerging. New South Wales remained the most in demand state, attracting a total volume of $11.2bn in 216, down 2% on 215 s figure of $11.4bn (Figure 8). As highlighted above, this has coincided with a move to acquire assets located in fringe and suburban markets as the CBD has become more tightly held. Victoria has been the big improver in 216. Investment momentum soared in the second half of the year to reach $5.7bn from $2.9bn in H In annualised terms, the $8.6bn recorded in 216 was a 37% improvement on the 215 result. While increases were seen across most sectors, it was most pronounced for industrial and mixed-use. Outside of this, results were more muted. The lack of large national portfolio transactions limited investment volume for Australia-wide deals, while investment in Queensland was down 16% y-o-y to $4.3bn. The major component of this was a significant decline in Brisbane office investment due to weak fundamentals, though many believe that the bottom of the tenant-demand cycle has passed and that office fundamentals should begin to stabilise and improve 1. Outlook Further portfolio transactions expected Looking at 216 in review, the investment market has played out largely the way we forecast at this point last year investment volumes to be upheld, geographical and sectoral diversification and ongoing yield compression. In annualised terms, investment volume was up 4%; there was a surge in volume in Victoria and in the industrial sector; and there was further yield compression (Figure 9). At the global level, the US Federal Reserve once again lifted rates in December just the second increase in a decade. As previously shown by Cushman & Wakefield research, US property yields are more correlated to US GDP growth, which has an improving outlook, than to interest rates. However, with the pace of US interest rates set to increase in 217 and with a new US administration, there is a mix of headwinds and tailwinds to navigate. Despite a potentially more challenging global landscape in 217, which could include greater volatility, the outlook for the Australian commercial real investment market remains positive. Although there is likely to be upwards pressure on Australian government bond yields, as US Treasury yields move higher, the spreads to Australian commercial property yields still look attractive, especially when compared to other international property markets. This, together with the considerable amount of capital that remains to be deployed, should sustain investment volume in 217. If owners choose to bring assets to market to take advantage of the buoyant market, then volume may nudge higher. Given the overall level of competition to secure assets, this is likely to maintain downward pressure on yields for the near-term. Investors will continue to seek core assets, though given recent trends, landlords may be unwilling to release these assets. Therefore, we expect to see further geographical and sectoral diversification. In the office sector this is likely to be to Sydney s fringe markets, which are underpinned by strong fundamentals and a substantial amount of public expenditure on infrastructure. In Brisbane the peak in office vacancy has now passed, with the market to benefit from significant stock withdrawal over the next year and ongoing recovery in tenant demand. Together with an average prime yield spread of over 125 bps to Sydney, we expect these factors will encourage investors to become more active in this market. Outside of the office sector, retail assets with strong catchment dynamics and/or the potential for value-add will remain in demand. Much of the liquidity for this sector will likely come from the more numerous, smaller centres though should any larger centre be brought to market this could drive further repricing. In the industrial sector, attention will remain on high quality logistics and warehousing assets, especially in markets with high tenant demand and limited supply. Figure 8 Investment activity by State/Territory (AUDm), 216 Source: Cushman and Wakefield Research Figure 9 Australian prime office yields 9% 8% 7% 6% 5% 4% 3% Others $1,759 WA $96 Australia Wide $3,231 QLD $4,38 VIC $8,594 NSW $11,21 Sydney Melbourne Brisbane Forecast 1 Cushman and Wakefield Office leasing trends and outlook 217 cushmanwakefield.com INVESTMENT MARKETBEAT 5

6 Chief Executive James Patterson Chief Executive Australian & New +61 () Capital Markets James Quigley Head of Capital Markets, Australia & New +61 () Capital Markets - Retail Sashi Makkapati Senior Director, Retail Investments +61 () sashi.makkapati@cushwake.com Metropolitan Sales Nick Spiro Director, Commercial +61 () nick.spiro@cushwake.com Valuation and Advisory John Waugh Head of Valuation and Advisory, Australia & New +61 () john.waugh@cushwake.com Capital Markets Paul Fernandes National Director, Capital Markets +61 () paul.fernandes@cushwake.com Metropolitan Sales Tom Barnier Director, Sales and Investments NSW +61 () tom.barnier@cushwake.com Industrial Tim Cassidy Director, Head of Industrial NSW +61 () tim.cassidy@cushwake.com Asset Services Simon Cox Head of Asset Services, Australia & New +61 () simon.cox@cushwake.com Capital Markets - Retail Nick Potter Head of Retail Investments, Australia & New +61 () nick.potter@cushwake.com Metropolitan Sales Patrick O Callaghan Director +61 () patrick.ocallaghan@cushwake.com Industrial Michael Callow Director, Industrial +61 () michael.callow@cushwake.com Disclaimer The information in this material is general in nature and has been created by Cushman & Wakefield for information purposes only. It is not intended to be a complete description of the markets or developments to which it refers. The material uses information obtained from a variety of sources which Cushman & Wakefield believe to be reliable however, it has not verified all or any information and does not represent, warrant or guarantee its accuracy, adequacy or completeness. Any forecasts or other forward looking statements contained in this material may involve significant elements of subjective judgment and assumptions as to future events which may or may not be correct and are beyond the control of Cushman & Wakefield. Cushman & Wakefield is not responsible for any loss suffered as a result of or in relation to the use of this material. To the extent permitted by law, Cushman & Wakefield excludes any liability, including any liability for negligence, for any loss, including indirect or consequential damages arising from or in relation to the use of this material. All expressions of opinion included in this material are subject to change. 217 Cushman & Wakefield. All rights reserved. To see a full list of all our publications please go to cushmanwakefield.com or download the Research App Global Headquarters 77 West Wacker Drive 18th Floor Chicago, IL 661 USA phone fax info@cushwake.com Level 22 1 O Connell Street Sydney, New South Wales, 2 Australia phone +61 () cushmanwakefield.com