Foreign investors are leading the charge for investment into offices, according to the latest data.
Analysis from JLL found that offshore buyers took the largest share in Australian commercial property market sales, spending $2.8 billion in the six months to June 30 compared with $3.2 billion for the full year 2023.
The agents reported that combined investment in office, retail and industrial was 60 per cent higher in the second quarter of the year compared to the first, with $2.7 billion in office and $3 billion in the industrial sectors, accounting for 80 per cent of the total.
Foreign investors accounted for 24 per cent of total investment sales, up from a low of 16 per cent in 2023—although this is still below the 32 per cent 10-year average.
JLL head of capital markets for Australia and New Zealand Luke Billiau said that given the skew towards the second half, JLL estimated a total volume of $28 billion in 2024.
The jump in sales in the second quarter partly reflected the ongoing appetite for industrial assets, more price discovery, and updated valuations in the office sector that generally assisted with closing the bid-ask gap, he said.
“We need to start getting comfortable with uncertainty. Still, risks are being priced in and more groups are starting to look to Australia for stability, growth and interesting investment opportunities,” Billiau said.
Head of real assets research for the Pacific region at MSCI Ben Martin-Henry said JLL’s data was broadly in line with what the analysts expected.
“We expected Q2 numbers to balloon as the bottom of the market was approaching, and you’re better off getting in and around the bottom, because once its bottomed out everyone knows and they will try and get back in, resulting in price tension and price increases,” Martin-Henry said.
“Our market is underperforming compared to the rest of the world in transaction volumes, which is not necessarily bad, as we’re not selling with massive writedowns like in UK and US, but it’s encouraging to see it bounce back.”
The return of foreign investors is also to be expected, given their proclivity for investing in Australia’s office market.
“Last year was really low turnout for overseas investors, because they deploy capital predominantly in [the] office market—it was their number one market for the past 23 years and the first time it wasn’t was last year,” Martin-Henry said.
“So it’s not a surprise the are coming back and making a big splash, they like the fundamentals here, and so far the office sector accounts for 56 per cent of offshore capital deployment.”
Large institutional sales in Sydney—including Mirvac’s partial $1.3-billion sale of 55 Pitt Street to Mitsui Fudosan, Barings acquisition of 40 Miller Street for $145 million (at an estimated 14 per cent discount)—as well as Quintessential’s $250-million purchase of 240 Queen Street in Brisbane from Brookfield pumped up the numbers.
“Now is a time when buyers want to pick up office assets. There’s no point buying at top of the market because you won’t make money, but if it’s close to troughing, I would expect more buyers in the market, and sellers are rationalising needing to get rid of office stock, so this is not just a one quarter blip, and my only reservation is about pricing,” Martin-Henry said.
Case in point: Dexus last month announced that 170 of its 176 assets, comprising 30 office properties and 140 industrial properties, dropped by $1.3 billion in value in the first half of the year.
“They have quality stock and I was expecting prime offices to bottom out and therefore a writedown this quarter, but it was surprising how severely they wrote them down,” Martin-Henry said.
“I would expect to see office prices continue to trade well below book value in the next three to six months, but that means buyers will be able to get good discounts, and sellers more willing to offload them, so there will only be more activity in the office sector going forward.”
