By Philip Hopkins
OVERSEAS money is increasingly driving the recovery of the Australian commercial property market, with net foreign investment last year at its highest level since 1994, according to research from Jones Lang LaSalle.
Combined with the steady growth of superannuation money and the repatriation of funds from the sale of offshore assets by Australian investors, a big pool of capital is looking for real estate investments in Australia.
JLL's report, Values, Vacancies and Transaction Volumes - A Checklist of Real Estate Trends for 2011, said the Australian property market would be driven over the next two years by five short-term trends.
These were offshore investment, increasing sales, accelerating rental growth, tightening yields and rising capital values, and a continued thawing of capital markets.
The report's author, David Rees, JLL's head of research and consulting in Australasia, said offshore investors accounted for 19.9 per cent of commercial transactions (office, industrial and retail) last year - the highest proportion since 1994.
''In the hotel sector, Asian buyers accounted for 58.3 per cent of transactions, a proportion exceeded only once before, in 2002,'' he said.
Dr Rees said the latest annual survey by the Association of Foreign Investors in Real Estate ranked Australia fifth - behind the US, China, Britain and Brazil - as the country offering the best chance of capital appreciation this year. As well, the 2010 JLL transparency index survey ranked Australia No. 1 globally.
Key factors were Australia's stable economic growth, transparent capital markets, close links with product markets in Asia and financial markets in the US and Europe.
Recent changes in the regulations governing tax structures for managed investment trusts had further increased Australia's appeal.
Dr Rees's conclusions dovetailed with those of CB Richard Ellis executive director Kevin Stanley. Mr Stanley said in CBRE's outlook that a potential $22 billion pool of capital was available globally, much of it from Asian pension funds.
''Regulations in Asia are changing to allow for these pension funds to pursue global investments,'' he said. Asian investment in real estate had usually been quite low, but this was changing.
''If bumped up to a global standard of 10 per cent, this would release an estimated $20 billion for real estate investments on a global basis - or $2 billion for Australia if 10 per cent of that pie was allocated to the Pacific,'' he said.
Dr Rees said superannuation assets in Australia had grown by 62 per cent between 2005 and 2010. Despite the global downturn, the volume of funds available for investment had been rising and ''will be a big potential driver for demand in the Australian commercial property market in 2011-2012''.
"New sources of debt are emerging, debt markets are continuing to thaw, Australian REITs (real estate investment trusts) have recapitalised and are reweighting portfolios back to the domestic market and there is the long-term growth potential of super funds,'' he said.
Mr Stanley said super funds still had 13 per cent of their capital sitting in cash - twice the long-term allocation. ''If this was reduced to 6 per cent, that would create a $100 billion investment pool, some $10 billion of which could potentially be allocated to real estate,'' he said.
Other sources of real estate capital includes wholesale funds, with potentially $1 billion to invest; a $1.5 billion buy-up of real estate by A-REITS was not out of the question; and a likely $1 billion outlay by private investors.
Dr Rees said the ''wall of money'' evident in Australia from 2000 to 2007 was now re-emerging. ''After going offshore, the money has now been repatriated back to Australia and ''we are now looking at a rerun of the 1990s where too much money was chasing too few assets'', he said.
In 2006, Australian investors invested aggressively offshore, with a net balance of $13 billion in offshore asset bought compared to their sales in offshore markets. This net balance dropped to $3 billion in 2007 but nevertheless Australians continued to be net buyers offshore. ''In contrast, offshore investors returned to the Australian market in 2007 as net buyers, with a net balance of positive $2 billion between their purchases and sales in the domestic market,'' he said.
"Since 2008, Australians have been divesting offshore and repatriating capital while foreign investors have continued to be net buyers in the Australian market. The net balance of Australians selling assets offshore and foreign investors bringing capital in was $2 billion in 2008, $3.4 billion in 2009 and $4.2 billion in 2010.''
Dr Rees said the mismatch between the flow of funds and available assets was likely to persist. Implications could include asset price inflation or a bubble effect, increased development activity, growing interest in alternative forms of real estate exposure and an early return to offshore investment by A-REITs.
"This mismatch between capital and assets could kick start development as investors look to build assets if they can't find suitable assets to buy,'' he said.