PRIVATE REAL ESTATE INVESTING IN AUSTRALIA - The 2014 Guide to - FOR THE WORLD'S PRIVATE REAL ESTATE MARKETS
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OCT 2014 | perenews.com
FOR THE WORLD’S PRIVATE REAL ESTATE MARKETS
The 2014 Guide to
PRIVATE REAL ESTATE
INVESTING IN AUSTRALIA
A special supplement to PERE magazine
ROUNDTABLE | AUSTRALIA Photography by Britta Campion
(L to R) Michael Weaver, Martin Bruehl, Kylie Rampa, Trevor Cooke and Brett Robson Hold that window Australian real estate has become a global proxy for those seeking relatively stable investment, but offshore investors may need to employ a more bespoke strategy to succeed in a crowded market, where the window of opportunity is seen to be closing. By Florence Chong
ROUNDTABLE | AUSTRALIA
The Australia roundtable: optimistic about the weight of capital focused on the country’s real estate
A
ustralia’s economy is in transition from one reliant investment. Or, as Trevor Cooke, global head of real estate for
on mining and resources to one based on consump- the Asia-Pacific region at UBS Global Real Estate, calls it: “a
tion and services. That transition, according to some bond investment with a kicker coming from capital growth.”
experts, will provide a boost for the bulk of investment-grade
real estate in Australia. An edge for foreign buyers
However, questions linger as to whether the domestic In a world awash with cash, real estate has become a pre-
economy will be able to fully offset the slowdown in the ferred choice of investment — and Australia its safe haven.
global economy, particularly with China’s double-digit Commercial real estate transactions in Australia are on
growth shrinking to between 7 percent and 7.5 percent from track to match, if not overtake, last year’s record of almost
hereon in. And although Australia’s GDP growth dipped to A$29 billion ($27 billion). In the office sector alone, prelimi-
2.8 percent in the fourth quarter, it did bounce back in the nary figures from Jones Lang LaSalle (JLL) show A$8.6 billion
first quarter to 3.5 percent, showing Australia’s resilience in transactions for the first six months of 2014, compared with
yet again. A$13.1 billion for all of last year.
Indeed, roundtable participants wave away thoughts of In its latest report on global capital movements, JLL notes
an impending slowdown. Rather, they speak bullishly of the that Sydney pulled in A$5.6 billion in cross-border capital for
promise of continuing economic strength in the Australian the first six months of 2014, double the figure for the corre-
economy, which is forecast to pick up further next year and sponding half of last year. Although that figure is distorted
thereafter. by the A$4 billion privatization of Commonwealth Office
To stimulate demand and generate growth, Australia has Property Trust, which was finalized in May, that activity
followed the rest of the developed world in lowering official lifted Sydney from the 15th most popular world destination
interest rates. As a consequence, the cost of borrowing contin- for capital to seventh in the first half.
ues to fall – down by 0.5 percent in the last six months – and Roundtable participants say foreign institutional buyers
leading economists expect further cuts until the first half of have an edge over local buyers primarily because they are pre-
next year because of sagging retail sales. pared to use higher gearing. When that is combined with the
The optimism among the participants is founded on the relatively high yields still available in Australia, investors find
weight of capital seeking a home in Australian real estate, they can achieve their targeted internal rates of return purely
which has become a proxy for those seeking relatively stable through the way they structure their acquisition financing.
4 PERE | THE 2014 GUIDE TO PRIVATE REAL ESTATE INVESTING IN AUSTRALIA
However, they warn that the window of opportunity is closing
rapidly as yields continue to tighten and quality assets become Kylie Rampa
harder to come by. Managing director of
Indeed, fierce competition is forcing investors to be more investment management
creative in their approach, and they sometimes need to take for Australia
on some construction risk by forward-funding developments Lend Lease
to stake ownership in premium office towers even before they
come off the ground. The risk, participants figure, is justified One of Australia’s best-known
by the certainty of securing an asset in what they see as the women executives, Rampa was
strongest economy in the developed world. lured to Lend Lease in 2013 to run
“We’re forecasting improving but below trend growth,” says its Australian investment man-
Kylie Rampa, Lend Lease’s managing director for investment agement and separate mandates
management in Australia. “We expect a moderate improve- business. She also looks after its retail asset management
ment in economic activity in the next year, as the recent and development business.
strength in housing activity flows through to other sectors. In 2011, Rampa returned from New York, where she
This is consistent with an economy that is shifting from min- headed Macquarie Group’s North American real estate
ing investment to focus on domestic consumption.” advisory business, to become chief executive of
Brett Robson, global head of Macquarie Capital’s real estate Melbourne-based Gandel Group, controlled by billionaire
private capital markets group, says growth in Australia will be shopping center magnate John Gandel. Between 2000
around 3 percent this year — in line with Australia’s 10-year and 2006, she was chief executive of the Macquarie
average GDP growth but lower than the 20-year average of Countrywide Trust, now Charter Hall Retail REIT.
3.3 percent.
“In historic terms, you are seeing a downturn,” says Martin
Bruehl, head of international investment management at Robson notes that NSW and Victoria, which were held back
Union Investment Real Estate, one of Germany’s largest asset by high interest rates during the mining boom of the past
managers. “However, if you come from Europe like me, the decade, now contribute more than half of Australia’s GDP.
economic story is still far better than the European market.” “Quite often, people overseas have the misconception that
When one looks at the sluggish global economy, the fact Australia relies on resources and commodity prices, but it is
that Australia has “a 3 in front of its GDP figure” is testament predominantly a services-based economy,” he says.
to the resilience of its economy, adds Cooke. The positive impact on the property market is evident.
“The impact of low interest rates is starting to kick through,”
Towards a more traditional economy says Rampa. “Retail sales are stabilizing, and our forecast is
The roundtable participants agree that the transition from a for stronger sales. White collar unemployment, we feel, has
decade-long investment boom in Australia’s resources sector bottomed and is about to trend up, which will help the office
to what is a more traditional Australian economy, based on its market.”
services sector and domestic consumption, has begun. As a visitor, Bruehl observes a disconnect between the capi-
Michael Weaver, portfolio manager with Brisbane-based tal markets and the employment market, but he notes that this
Sunsuper, one of Australia’s largest superannuation funds, is not a unique situation. “You have this (happening) all over
says the most significant change in the economy is that the world,” he says. “The weight of capital compresses yield,
growth is starting to come from New South Wales (NSW). In but vacancy levels and the fundamentals of the market aren’t
recent years, growth was driven by the resource-rich states of quite there yet.”
Western Australia and Queensland.
Office politics
In terms of Australia’s office space, UBS believes that 2014
will be the low point in vacancies. While Cooke has con-
cerns about the impact of new supply on the office market,
he says the fundamentals of supply and demand in premium
and Grade A CBD office markets, particularly in Sydney and
Melbourne, actually look fine.
“Sydney is the only market where you are seeing vacan-
cies reduce, whereas Brisbane is about to hit close to all-time
highs,” says Robson. “The disparity in the outlook for individ-
ual markets is much greater then the overall macro picture.”
Perhaps that is because the Australian office market is driven
by global factors and demand is more correlated to the US
Kings Square in Perth: an example of a forward-funding deal and Asian equities markets than to Australian GDP, Robson
THE 2014 GUIDE TO PRIVATE REAL ESTATE INVESTING IN AUSTRALIA | PERE 5ROUNDTABLE | AUSTRALIA
explains. “Unemployment is the lagging indicator because companies
Going, gone are notoriously slow to fire and hire,” he says. “The unemployment
The 10 largest single-asset real rate is relevant for where you are at, not where you are going.”
estate deals in Australia over the However, Sunsuper’s Weaver remains cautious. “We would like to
see some real signs of the office market picking up before we can share
past 12 months the positive view of others. Last year was supposed to be the year when
office vacancies would bottom out, but that didn’t happen. Now people
52 Martin Place, say this will be the year of recovery.”
Sydney Weaver believes businesses need more confidence before they will
Seller: QIC Real Estate take up more space. “You are not necessarily seeing that confidence
Buyer: REST Super just yet, which is why we still have a high level of vacancies,” he adds.
In fact, in some cases, the reverse is true. “Some people (still) are
Price: A$555 million trying to downsize, so I definitely question whether the recovery is
here yet,” Weaver asserts.
Signs of life
Northland Where commercial tenants are taking up space, Rampa says they
Shopping Centre, are going for buildings offering good locations, high sustainability
Melbourne credentials and the ability to accommodate flexible workplace envi-
ronments. “Our view is that having the right assets in your portfolio
(50 percent stake)
makes all the difference, and we are seeing this shift in demand across
Seller: Canada Pension our portfolio,” she says.
Plan Investment Board Bruehl notes that this shift is a global phenomenon. “It is increas-
Buyer: GPT Group ing the speed of the functional obsolescence of buildings, and cities
Price: A$496 million or markets with aging stock will see a transformation,” he says. “In
Sydney, you are seeing some older office stock being converted into
residential. This removes some of the surplus office stock and fosters
Westpac Plaza, market balance.”
Sydney Like other global investors, Bruehl is surprised by the high level of
(50 percent stake) incentives – up to 35 percent – used to entice major tenants to anchor
large office blocks in Australia. “Something must have happened in
Seller: Mirvac Group the past, and tenants seem to have got used to the high level of incen-
Buyer: The Blackstone tives,” he quips.
Group Despite the delayed recovery in the office rental market, the push
Price: A$435 million to buy Australian office blocks continues unabated. For example, in
July, Australian industry superannuation REST bought 52 Martin
Place, a landmark office tower in Sydney, from QIC Real Estate for
177 Pacific Highway, A$555 million. And in March, The Blackstone Group paid A$435 mil-
North Sydney lion to Mirvac Group for a 50 percent stake in Westpac Place, also in
Seller: Leighton Sydney.
Properties “While interest rates stay low and the cost of capital is continuing to
Buyer: Suntec REIT go down over time, investors are happy to pay for decent yields,” says
Weaver. “So, even when occupancy rates of buildings are not where
Price: A$413 million
you would like them to be, demand remains strong.”
Cooke adds: “Globally, demand for investment is turbo-charged by
the rate of capital formation. We are seeing first-time capital coming
into real estate, while existing investors have access to a lower cost of
1 William Street, capital — and that is driving pricing.”
Brisbane Curiously, Australia has not yet seen the compression of capitaliza-
(50 percent stake) tion rates that has happened in other big markets around the globe. In
fact, prime office buildings in Australia are changing hands at average
Seller: CBUS Property yields of 5.5 percent to 6.25 percent.
Buyer: ISPT Weaver says one reason that prices have started to move signifi-
Price: A$395 million cantly overseas is because base rates in those markets were lower than
in Australia. He adds that investors are happy to pay a higher price as
long as they still can access a positive yield spread.
6 PERE | THE 2014 GUIDE TO PRIVATE REAL ESTATE INVESTING IN AUSTRALIA“If investors can get long-term debt overseas at below 4 percent all-
in, and they are buying an asset at a 5 percent cap rate, this gives them QV1 Tower, Perth
a positive spread and that gives them comfort,” Weaver explains. “The (50 percent stake)
base rate in Australia has dropped to 2.5 percent only in the last year Seller: Investa Property
or so, but it has been close to zero percent overseas for nearly six years.” Group
Buyer: Investa Com-
Competitive financing mercial Property Fund
Also contributing to increased investment activity in Australia is the
Price: A$388.5 million
fact that the all-in spread on borrowing today is some 50 basis points
lower than six months ago. “One of our clients just locked in four-year
debt at a spread of 105 basis points and a total cost of 4.1 percent,”
Robson says. “Six months ago, the rate on the same debt was closer to
5 percent.” Sydney Corporate
Rampa notes that healthy competition among lenders is contribut- Park, Sydney
ing to price tensions. “There is an emergence of alternative sources of
debt, Asian banks are active in the market and superannuation funds Seller: Rathdrum
also are starting to step into lending,” she says. Properties
For someone like Union Investment, the benefits are two-fold - a Buyer: Goodman Group
lower cost of borrowing in a market that still offers yields higher than Price: A$343 million
what is available in London or Munich and relatively low hedging
costs. “We run euro-denominated funds, and hedging costs used to
be prohibitive,” says Bruehl. “Now, currency hedging costs are at a
10-year low.”
This advantage is one reason why the large German asset manager
has come to Australia. “We want to exploit the window, which we 260-300 Elizabeth
think will be open for 18 months or two years,” Bruehl says. “I wish Street, Sydney
we had come to Australia a couple of years earlier.”
Seller: Investa Property
Since Australia’s housing market went into overdrive, the Reserve Group
Bank of Australia has been making noises about lifting interest rates
Buyer: Invesco Real
to take heat out of the sector. Robson notes that office fundamentals
Estate
improve when interest rates are starting to rise, but savvy investors get
out before rates peak. Price: A$305 million
The creative route to assets
As many global investors coming to Australia have noticed, good
stock - be it in office, retail or logistics - is tightly held in Australia. In
3 Collins Street,
light of this, Rampa suggests that the commercial advantage for Lend
Lease’s investment management business is in leveraging its large
Melbourne
pipeline of projects. Seller: Walker Corp
“We currently have a substantial new pipeline – Barangaroo (in Buyer: CIMB Trust
Sydney), Batman Hill (in Melbourne) and other projects coming out Capital Advisors
of the ground,” Rampa says. “Our key focus is matching capital to Price: A$279 million
those products.”
Robson agrees with the approach, noting that investors need to be
more creative to seek out assets because the best portfolios are rarely
offered through sales campaigns.
Indeed, global investors – the likes of Canada Pension Plan
Investment Board (CPPIB), Singapore’s GIC Private Limited and the Northpoint, North
Abu Dhabi Investment Authority – have joined forces with domes- Sydney
tic institutions to open Australia’s highly securitized market, where
the best real estate tends to be locked up. These investors and their Seller: Centuria Group
Australian partners have taken the privatization route. Buyer: Cromwell
CPPIB, for example, joined Dexus Property Group to take over Property Group
and privatize the listed Commonwealth Office Property Fund this Price: A$278.6 million
year. Other equally deep-pocketed investors, like China Investment
Corporation and the Netherland’s APG Asset Management, have
THE 2014 GUIDE TO PRIVATE REAL ESTATE INVESTING IN AUSTRALIA | PERE 7ROUNDTABLE | AUSTRALIA
certain level of leasing pre-commitments,” says Macquarie’s
Trevor Cooke Robson, adding that the risk does not diminish the propensity
Global head of real estate to back developers. And it is happening around the world.
for Asia Pacific Union Investment made its entry into Australia by forward-
UBS Global Asset Management funding an office block in Brisbane and is on the lookout for
more such opportunities. “It would be desirable to build a
Cooke joined UBS in May 2013 as portfolio of A$700 million to A$800 million in Australia to
global head of real estate for Asia give us a platform with scale and critical mass,” Bruehl says.
Pacific to strengthen the Swiss “It will be a tall order in competition against Australian
bank’s $24 billion real estate funds.”
platform. Before that, he was UBS has formed an alliance with Grocon, one of Australia’s
managing director for strategy largest private developers, controlled by Daniel Grollo. “The
and international business development with Queensland relationship creates the foundation for us to build out a
Investment Corporation, where he implemented the platform,” says Cooke. Under the agreement, UBS will have
investor’s investment plan across Asia, Europe and North access to Grocon’s existing A$2 billion development pipeline,
America. He also spent four years with AMP Capital but this does not preclude it from buying on the open market
Brookfield, a specialist listed real estate and infrastructure when opportunities arise.
fund manager. UBS also is seeing interest from more separate account
investors. “Certainly, we are seeing more sophisticated inves-
tors with bigger property teams and the need for a larger
joined consortiums to acquire and delist vehicles, such as the ticket size,” says Cooke. “For reasons of control and decision-
ING Industrial Fund, in the wake of the global financial crisis. making, they are opting for separate accounts. This trend is
As Robson sees it, this is the “smartest approach” to access happening in Australia and overseas.”
high-quality Australian real estate. However, he argues that Macquarie recently finalized documentation for an investor
the window is pretty much closed now because listed trusts who has a very specific mandate to develop and own a prime
are no longer trading below net tangible asset value. logistics portfolio in Australia. “They are putting in signifi-
That said, Singapore-based Frasers Centrepoint Trust cur- cant equity and can write bigger checks than any Australian
rently is making a play for Australand, a diversified listed group could,” says Robson. “This group will develop a logis-
property group. In addition, there is takeover speculation sur- tics portfolio in excess of A$500 million.”
rounding Investa Office Trust, which is controlled by Morgan For Bruehl, Australia is about local joint ventures and
Stanley Real Estate Investing and is trading at a 6 percent or 7 expertise. ”It would be very naive to think that we could do
percent premium. this remotely,” he adds
Cooke says it may make sense to take a public vehicle pri-
vate because such transactions attract a concessional stamp Putting more debt into a deal
duty rate in Australia. Weaver describes stamp duty as “a very The financing choice differs between foreign and domestic
inefficient tax that makes for a less liquid market than you buyers. The former is open to leverage, averaging 40 percent
otherwise would have.” to 50 percent or higher in some instances, whereas the latter
“Transaction cost is the reason that big premium towers do
not trade often,” Weaver explains. “People who own them do
not necessarily want to sell because it is not easy to buy back Martin Bruehl
and, if they did, they would need to pay the transaction costs.” Head of international
investment management
The build-to-core bandwagon Union Investment Real Estate
Increasingly, partnerships or strategic alliances with
Australian developers, like Lend Lease, are the means to In May 2013, Bruehl was ap-
access high-quality assets. pointed to take charge of a newly
“Large investors look to Lend Lease as an asset creator, not created international investment
an asset aggregator,” Rampa says. “They come to our platform management department at
to have access to our pipeline of projects. This is not necessar- Union Investment Real Estate,
ily a new approach, but it becomes heightened when there is following a restructuring of the
less quality property on the market.” firm’s investment management activities. He is respon-
Calling it a ‘build-to-core’ strategy, Cooke says this is a sible for managing the German fund manager’s real estate
very attractive approach in a supply-constrained market. in the UK, the Americas and Asia. Prior to the appoint-
It involves investors forking over equity to fund projects in ment, he was the managing partner responsible for
return for ownership upon completion. Cushman & Wakefield’s operations in Germany.
“There are some construction risks, but there also is a
8 PERE | THE 2014 GUIDE TO PRIVATE REAL ESTATE INVESTING IN AUSTRALIAis conservative, sticking to a gearing range of 10 percent to 30
percent. Brett Robson
“Many Australian superannuation funds, such as us, go Global head of real estate
into property to diversify from equities (and fixed income),” private capital markets
says Weaver. “Therefore, we are after underlying property Macquarie Capital
returns and not necessarily leveraged returns, which are more
sensitive to the business cycle.” Robson is a key contributor to
Because they are prepared to put more debt into a deal, Macquarie Capital’s dynamic real
Robson says foreign buyers can often win out. The reality, estate private capital markets
however, is that most Australian institutional investors do not team, with impeccable contacts
compete directly with foreign buyers and are more comfort- in the opaque world of sovereign
able placing their allocations with unlisted funds managed by wealth funds and large global
the country’s biggest fund managers. pension plans. Since 2003, this business has closed on
Sunsuper is a significant investor in wholesale funds man- $39 billion of equity commitments to fund 93 real estate
aged by the likes of Goodman Group. “It often makes sense transactions, including primary and secondary fund-
for us to go through funds,” says Weaver. “We have an alloca- raisings, club deals and joint ventures. Before joining
tion of around 10 percent to property, and we’re pretty much Macquarie a decade ago, he was with Lend Lease, where
at our target level.” he served in various roles including fund, asset and devel-
Robson adds: “Most of the Australian core funds have a opment management.
queue of equity wanting to get in. They have quite substantial
acquisition capacity, but the issue is getting assets.”
Rampa notes that institutional investors have the ability to offshore or move into less desirable sectors, such as Grade
contribute additional equity to managed funds, which con- B property on city fringes – areas previously considered not
stantly are raising capital. In the equities and other markets quite investment grade.
in Australia, the value of super funds’ shareholdings has gone Referring to it as version 2.02, Cooke says the move offshore
up and, as a result, they have moved to a slight underweight by Australian institutions is different to the previous wave in
position in real estate. the mid-2000s. Then, they entrusted their investment dollars
International groups like Blackstone and LaSalle Investment to listed Australian REITs, which sustained heavy losses in
Management have raised more than $4.5 billion this year for their offshore forays.
their Asian funds. Cooke says a lot of that money is yet to be This time round, Australian managers are going with local
deployed - and that is the challenge. However, Robson notes managers in overseas markets. “We have a very large US
that those global funds are expected to allocate just 10 percent platform, and we are getting much Australian interest,” says
of their capital to Australia. Cooke.
Sunsuper has been investing offshore for more than three
Moving offshore years. “Our offshore exposure is close to 30 percent of our
In such a crowded market, Australian investors have to go property portfolio,” adds Weaver.
In addition, Sunsuper opportunistically is investing in new
areas like the tourism sector, which many institutional inves-
Michael Weaver tors would avoid. Weaver says the superannuation also could
Portfolio manager for private look at Grade B office buildings, but he adds that even second-
capital ary assets are hotly pursued, although not by large global and
Sunsuper Australian institutions.
For Union Investment, the due diligence effort for a
Weaver is the portfolio man- $50 million property is the same as for $250 million. “We are
ager responsible for property, looking upwards of $100 million, but I prefer $200 million to
infrastructure and private capital $250 million or $300 million,” Bruehl says. “That is when we
investments at Sunsuper, an can get the scale and justify coming to Australia.”
A$29 billion superannuation with Union Investment has several vehicles, two of which are
A$2.5 billion in property invest- looking to invest Down Under – a €10 billion vehicle and a
ments through funds and direct assets in Australia and €1.7 billion fund. “The bigger fund is able to take more indi-
offshore. His responsibilities include portfolio construc- vidual asset risks, while the smaller fund goes for smaller lot
tion, investment research and selection and ongoing sizes,” Bruehl notes.
review and reporting. Prior to joining Sunsuper in 2006, As someone who has put a great many deals together for
he was a consultant with Mercer, providing advice on foreign investors, Robson has the final word. “Australia is
superannuation to large corporate clients. still attractive, but offshore investors may need to use a more
bespoke strategy to succeed in this market,” he says.
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