Foreign investment has been a critical enabler of the growth of the Australian property sector into the single most important sector in our nation’s economy, according to ESR Australia, a leading developer and manager of industrial, logistics and commercial property.
The sector currently contributes over $200 billion to GDP per annum, making it approximately 13 per cent of the total economy and employing more than 1.5 million people—more than mining and manufacturing combined.
It is unlikely that the sector could have grown to this scale without the foreign capital flows that have underpinned the funding for many of the significant development projects in Australia, including Barangaroo and the Wynyard Station redevelopment in Sydney as well as Docklands in Melbourne.
According to data from JLL, the amount of foreign capital flowing to the Australian commercial property sector has tripled during the last decade, rising to over $10 billion annually and now accounting for approximately 40 per cent of all commercial real estate transactions.
Almost all foreign capital is invested through fund managers, either domestic property groups or more prominent global property fund managers with sizeable local teams.
These capital inflows have fuelled competition in the property funds management sector, stimulating innovation and productivity and helping to position Australia as a leading player globally.
Governments at all levels have benefited from the increasing property values and sales volumes, which have filled their coffers with property tax revenues.
The recent $3.8-billion Milestone transaction was illustrative of how foreign capital is fueling the Industrial sector’s emergence as the in-demand asset class, with three of the final four bidders being funded by foreign investors.
Since this landmark deal, yields industry-wide have compressed even further, with prime metropolitan industrial assets now regularly trading at cap rates below 4 per cent, further stimulating activity across various disciplines.
Recently foreign investors have shown heightened interest in participating in development activities. This has in part been driven by the highly competitive market for stabilised property, with development exposures (for example, through develop to hold strategies) being a way for these investors to generate returns sufficient to meet their hurdles.
One of the industrial-focused property funds management groups at the forefront of this shift has been ESR Australia, which raised $1billion for its ESR Australia Development Partnership (EADP) from foreign institutional investors during the 2020 Covid-19 lockdowns.
This timing proved fortuitous given the subsequent boom in e-commerce and restructuring of supply chains, further increasing tenant demand and investor appetite for industrial real estate to unprecedented levels, ESR said.
In the last year, other property funds management groups have also been tapping foreign investors for new funds with development capabilities, including GPT for Quadreal and Stockland for JP Morgan Asset Management.
In light of the positive impact that foreign capital has made on the Australian property sector, it is essential to remember that these sovereign wealth funds, pension funds, and global investment groups have options to invest their capital elsewhere across the Asia Pacific region.
These investors typically choose to invest in Australia over other competing markets such as China, Japan, Korea, and Singapore because of Australia’s strong economic growth, stable legal and policy framework, and open foreign investment policies.
ESR Australia credits its swift and substantial growth in the local market through leveraging long-standing relationships built over time with global institutional investors such as GIC, M&G, Townsend and China Merchants.
As APAC emerges from the pandemic and further opportunities for pent up capital to be unlocked present, other Australian developers will be faced with the onus and opportunity to think bigger in brokering relationships and subsequent deals with foreign partners.
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