LaSalle ISA: Melbourne and Sydney office present best core opportunities in Australia
SYDNEY (February 15, 2017) — Australia’s domestic growth environment remains a supportive backdrop for improving real estate fundamentals: it continues to shrug off external risks and GDP growth surprises on the upside with above-trend growth. Net exports, public sector and private housing investments have also contributed to growth.
LaSalle Investment Strategy Annual Says Asia Pacific Real Estate is Well-Positioned in 2017
LaSalle Investment Management is cautiously optimistic on the economic backdrop in Asia Pacific which is generally supportive of real estate market fundamentals, structural shifts in Europe and North America notwithstanding.
According to the firm’s Investment Strategy Annual (ISA) 2017, the rise of core capital, the continued growth of intra-regional tourism and trade, increasing infrastructure spending as a form of fiscal stimulus, and the shift from export-driven economies to domestic consumption provide ample real estate investment opportunities across the risk-return spectrum for investors to capitalize on.
Australia’s domestic growth environment remains a supportive backdrop for improving real estate fundamentals: it continues to shrug off external risks and GDP growth surprises on the upside with above-trend growth. Net exports, public sector and private housing investments have also contributed to growth.
Jacques Gordon, Global Head of Research and Strategy at LaSalle, said: “The winds of change will be blowing throughout the world economy and the US in 2017. Headwinds and tailwinds can both be expected, along with market turbulence. While structural changes will likely define the outlook for specific strategies in the U.S., real estate performance in most cases will be driven by secular shifts.”
“The ISA’s best investment recommendations are aligned with the demographic, technology, urbanization, and environment (DTU+E) secular investment trends. Although some of these opportunities have become fully-priced, there is still value in portfolios that focus on the evolution of these long-term trends,” he added.
The ISA indicates that in addition to Trump-induced volatility, there are other threats to financial market stability still to be navigated. The growth of China remains a key growth driver but also a risk in the region. The report suggests that the immediate threat of a China hard landing is low. LaSalle believes that the global ripple effect of China’s debt challenge in the next few years remains a low-probability event, as China’s debt is mostly domestic and supported by high national savings rates.
Australia is seeing rising institutional wealth from superannuation funds which have been growing at over 12% per annum over the past five years, with assets under management of about US$1.5 trillion. Over the next 20 years, they are projected to grow at 8% per annum and substantially exceed the growth rate of Australia’s commercial real estate market over the next two decades. LaSalle observes that the superannuation funds could stay at home, driving up core prices further and widening the scope of core assets in Australia, or alternatively invest offshore.
Elysia Tse, Head of Research and Strategy – Asia Pacific at LaSalle, said: “Looking forward, a ‘soft landing’ in Australia’s housing market could be expected, especially with pockets of oversupply in the for-sale condominium sector. Over the long-term, Australia’s
economic outlook remains robust, underpinned by the strongest population growth among major developed economies in the world. Australia continues to be a safe haven for real estate investors and we continue to favor developing or leasing strategies in selected
Australian markets with strong or recovering fundamentals to satisfy the growing appetite for core investments.”
“Overall, the Asia Pacific region remains strong, relative to the rest of the world. This does not mean the structural shifts rocking the UK, Europe and the US do not have implications on the regional economy and real estate markets across Asia Pacific. The events are still unravelling by the day, the impact of which is still being felt. There is ample liquidity in the region. If more volatility or uncertainties arise in other parts of the world, Asia Pacific’s relatively stable collection of nation states should be viewed favorably by international investors. If capital markets become highly volatile for an extended period of time, Asia Pacific real estate would
not be fully insulated. However, there could be opportunities to bridge funding gaps through debt or equity strategies,” she added.
Tse concluded: “Asia Pacific real estate markets have different lengths of cycles and are currently at diverse stages of the cycle. This unique diversity offers a range of opportunities for investment and the ability to diversify risk at any point of time. For low-risk investors, stability of income remains the focus in 2017. In addition to Australia, Japan continues to be a safe haven for core investors due to its strong property rights and healthy yield spreads. For higher risk investors, the secular trend of the rise of core capital is expected to create exit options for ‘value-add to core’ and ‘build to core’ strategies.”
The report also indicates that borrowing costs are expected to remain low by their historical standards in the region over the near to medium term. Spreads between real estate yields and risk free rates remain relatively wide in Asia Pacific. A significant yield expansion is unlikely, as wide yield spreads can absorb some interest rate increases (if any). This will keep the return profile of real estate assets attractive relative to other asset classes.
Key highlights for Australia:
- New South Wales and Victoria will continue to outperform other states reflected in strong office fundamentals in Sydney’s metropolitan area and Melbourne’s CBD. LaSalle forecasts above-inflation face rental growth, while incentives keep reducing from historically high levels in these two markets.
- Repositioning strategies will allow investors to capture some uplift in net operating income.
- CBD office lease-up/refurbishment and mixed-use infill retail in Australia offer some of the best value-add opportunities in the region.
- Long-term growth of intra-regional tourism is anticipated to enhance returns in the urban retail and hotel sectors and mixed-use projects in Australia.
- Debt strategies, student housing and multifamily developments in Australia present good opportunities for niche investment, but require further examination on execution.
Investment themes for Asia Pacific:
- Capitalize on intra-regional business and leisure travel: The long-term growth of intraregional business and leisure travel is anticipated to enhance returns in select urban retail,hotel and mixed-use properties in Asia Pacific.
- Capitalize on new infrastructure locations: Key Asia Pacific economies are expected touse both monetary and fiscal stimuli to support growth. The increasing infrastructure spending as a form of fiscal stimulus offers investors opportunities to capitalize on real estate projects near new infrastructure locations, such as in Sydney and Singapore.
- Logistics: LaSalle continues to favor logistics in the region, driven by the sector’s relatively high yields, the rise of e-commerce and a shortage of modern logistics space.
- Retail: Neighborhood and sub-regional retail assets in strong catchments focused on nondiscretionary spending for both core and repositioning opportunities.
- Office: Major regional office markets are currently at different stages of the rental cycle. LaSalle advises higher return investors to focus on active management strategies and repositioning in this current cycle to improve risk-adjusted returns.
- Apartments: Following LaSalle’s DTU+E secular themes, rental apartments in urban areas, particularly in Japan, offer investors attractive relative values with excellent longterm fundamentals. Singapore serviced apartments can capture not only DTU+E secular trends, but also the structural change due to government zoning.
Globally, the ISA finds that real estate returns will vary depending on the vintage of assets held. For assets already owned, improving economic fundamentals will boost performance. At the same time, returns on new core investments will be hard-pressed to repeat those of recent years as elevated levels of liquidity have pushed prices up to levels where new investors with fresh capital will need to accept low returns by historical standards.
About LaSalle Investment Management
LaSalle Investment Management, Inc. (together with its global investment advisory affiliates, “LaSalle”) is one of the world’s leading real estate investment managers. LaSalle on a global basis manages approximately $59.5 billion as of Q2 2018 of private and public equity and private debt investments. LaSalle’s diverse client base includes public and private pension funds, insurance companies, governments, corporations, endowments and private individuals from across the globe. LaSalle sponsors a complete range of investment vehicles including separate accounts, open- and closed-end funds, public securities and entity-level investments. LaSalle Investment Management, Inc. is a wholly-owned, operationally independent subsidiary of Jones Lang LaSalle Incorporated (NYSE: JLL), one of the world’s largest real estate companies. For more information please visit www.lasalle.com.
This information is based on the market analysis and expectations of LaSalle and should not be relied upon by the reader as research or investment advice regarding LaSalle funds or any issuer or security in particular. The information presented herein is for illustrative and educational purposes and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy in any jurisdiction where prohibited by law or where contrary to local law or regulation. Any such offer to invest, if made, will only be made by means of a private placement memorandum. Past performance is not indicative of future results.