PERE: We’ve reported on a number of very high-profile investments in Australia over the past couple of months. Why is that?
Brett Robson: In some ways, it surprises me these haven’t happened earlier. On a pure fundamentals basis, Australia is about as attractive as it gets at the moment. Obviously, there’s the link with China and the growth that comes with that, but actually I think the better part of the story is the downside protection that comes with investing in the country. The Australian economy has moved somewhat counter-cyclical to the rest of the world in recent cycles and currently is at the end of a monetary policy tightening phase. Official cash rates are at 4.75 percent, and the Reserve Bank just announced they’ll likely increase to 5 percent in July.
PERE: Would you say that is at the back of international investors’ minds when they commit capital to the country?
BR: I don’t think it’s just that. Looking at relative opportunity, yields have compressed well ahead of fundamentals in office markets like London and New York. On a cash-on-cash basis, office markets like Sydney or Melbourne are generating cap rates of 7 percent. In addition, leases in these markets are structured with about 4 percent fixed rent growth per annum, and market rent growth is projected to be double digit per annum over the next three-plus years.
PERE: Which sorts of investors should Australia appeal to most?
BR: For long-term core investors like pension funds and insurance companies, there’s a real opportunity to buy into existing structures. Look at Australia’s core wholesale funds, which own some of the best real estate. If you take offices as an example, their portfolios currently have approximately 7 to 7.5 percent weighted-average cap rates, their long-term average is about 6.5 percent and their peak is in the 5 percent range. Consider that and then consider Australia probably has the strongest market fundamentals, and you can see a decent opportunity.
There’s not a huge amount for opportunity funds, however, because they can probably make better returns in Asia’s emerging markets. Australia is mature and confined, and there aren’t a lot of corporate plays like Blackstone’s acquisition of Valad Property Group either. For a Pan-Asia opportunity fund, Australia should account for 10 to 20 percent of an allocation at best.
PERE: Nonetheless, big deals are happening in Australia, like the Goodman Group-led consortium’s privatisation of the ING Industrial Fund. How would you describe deals like that?
BR: That was one of the smarter plays we have seen. I think it will do very well but, again, that’s not a play for a private equity real estate firm. They got it at an attractive cap rate of about 8.25 percent. If cap rates come down to 7.5 percent, maybe with some yield compression and rental growth, they could get to a low teen IRR, but it’s never going to be 20 percent. That deal was just a sensible way for a core investor to buy high-quality real estate, taking core risk but gaining a core-plus return.
PERE: Sticking with investments by large international investors, are they the better-placed buyers for Australian real estate?
BR: Definitely, although Australia’s wholesale funds also are well positioned. They have very low debt, having paid down everything but perhaps their long-term loans, and have very significant acquisition capacity. They’re total return buyers, so they can buy a prime asset at 6.5 percent and sit tight.
PERE: Ok, so there’s less of an opening for high return seekers. Do private equity real estate firms fit in at all?
BR: Their scope is limited and, at the end of the day, Morgan Stanley Real Estate Investing and The Blackstone Group already have teams here. If there’s a good deal, they’re the guys who are likely to get it done.