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Are North American investors retreating from Australian CRE?

In 2020, US and Canadian investors deployed the least amount of capital in the country out of all overseas buying groups, according to RCA.

Commercial real estate investment volumes in Australia dropped by 44 percent to A$27.6 billion ($21.2 billion; €17.9 billion) in 2020, as strict lockdowns and border closures coupled with unmatched pricing expectations hampered the pace of cross-border inflows.

Particularly striking was the retreat of North American investors from the market last year. According to transactions research house Real Capital Analytics’ Australia capital trends report, US institutions invested a total of $521.9 million in 2020, a stark decline from the $4.8 billion invested in the prior year. Canadian investors also had a similarly tepid year, investing $50.2 million last year versus $3.3 billion in 2019.

As RCA analyst Benjamin Chow pointed out to PERE, North American investors had a quiet year across most of the world. They are understood to have consistently invested more than $10 billion per quarter abroad since 2011, but outbound allocations fell to a decade low of $8 billion in the third quarter of 2020, according to Chow.

However, the stark retreat from Australia can be attributed to a few specific factors. For one, Australia’s stringent lockdowns and near-shutdown in business travel meant only cross-border investors with local offices in the country were able to continue executing transactions during the pandemic. Some of the Canadian pension funds, for example, that had been doing deals out of their offices across Asia with little local presence in Australia itself, could have lost out as a result, agrees Chow.

However, valuations of certain property types also influenced their decision to pause investing. Chow told PERE there was a divergence in the pricing expectations of different buying groups when it came to the office and retail sector.

“Based on the offerings we observed, domestic sellers were generally holding out for pre-pandemic prices, which domestic buyers were extremely reluctant to match. Investors from Germany and Singapore, perhaps with a longer-term view of the Australian market, were more amenable to these pricing levels,” he explained. “Both of these investor groups were also more optimistic about the office and retail sectors worldwide, cutting their acquisitions in both sectors by around a quarter, in contrast with those from the US who halved their allocations in these property types.”

While US investors purchased fewer assets last year compared with their European and Singaporean counterparts, they were more active in selling assets. RCA’s research shows that private equity firm Blackstone, for example, is understood to have completed almost A$1 billion-worth of sales within the year.

The 2021 cross-border investing outlook for Australia, however, is believed to be more optimistic, according to RCA, with growing vaccine distribution and the relative lack of widespread resurgence in covid cases, unlike many other countries in the world.