PERE Predictions 2019: Allianz to be ‘selective’ about Australian office

Record prime office yields in Sydney and Melbourne is making the sector relatively unappealing for foreign investors like the German insurer.

Allianz Real Estate, the real estate investment manager of the German insurer, will continue to opt for investing in other property sectors besides office in Australia, on the back of record yields in key markets.

Talking to PERE about the firm’s investment plans for 2019, Rushabh Desai, Allianz Real Estate’s Asia-Pacific chief executive, said it will stick to logistics and student housing in the country. The firm, for instance, has not made any office investment in Australia this year.

“[I] don’t expect us to allocate a lot of capital in Australian office sector,” he said.

Elsewhere in Asia-Pacific, Allianz Real Estate would continue to pursue potential investments in the office sector in Shanghai, Beijing, Singapore and India.

Desai explained that the firm continues to be “fairly selective” about the sector in Australia. In fact, he pointed out how the investor made a divestment this year when it sold its stake in 2 Market Place in Sydney, a 24-level Grade A office building, for an undisclosed sum.

“[The] office sector in Australia was always attractive because of the yield arbitrage it had vis-a-vis other markets in the world. That arbitrage has narrowed significantly,” he explained. “Prime office yields in Sydney and Melbourne are between 4.5 and 4.75 percent.”

“I know there is some rental growth still being seen in Sydney and Melbourne, if you get the right location. But with the going-in yield narrowing significantly, we are fairly selective,” he added. “We are a principal investor. We stop investing if we feel we are not getting an attractive risk premium.”

Indeed, Allianz Real Estate’s view on Australia reflects the broader sentiment of the foreign investor community. As real estate services firm Savills pointed out in its Q3 2018 research report, foreign investor activity has “slowed down from the highs seen at the start of the property boom” due to lack of prime assets for sale in Sydney’s central business district, high capital values and record low yields. Average Grade A yields in the Sydney CBD, for instance, are estimated to have dropped 40 basis points in the 12 months ending September 2018, while average Grade B office yields fell 25 basis points.

Savills predicts the tightening to continue in 2018 as well as throughout 2019. Meanwhile, average capital values for Grade A assets in the same district increased 6.8 percent during the same period, breaking the $20,000 per square meter mark for the first time, the report noted.

As a result, in the 12 months to September 2018, foreign investors accounted for only 37 percent of all buyers in Sydney CBD, Savills noted, while an increased activity was recorded from domestic funds and trusts. Domestic buyers ended up accounting for 45 percent of all the buyers during the same period.