ASIA VIEW: The selling season

Lately, it seems like everyone in the Land Down Under is throwing their properties on the market. Look at Brookfield Property Partners, which announced plans in August to sell some of the core assets in its Australian portfolio, estimated by news reports to be worth around A$1.5 billion (€960 million; $1.9 billion). Meanwhile, Charter Hall, a fellow property owner in Australia, has put a A$700 million office and industrial portfolio on sale.

The list of planned sales by public and private property firms is unending. Australia’s real estate industry is the middle of a record selling spree with $5 billion worth of office towers, retail centers and logistics facilities reportedly set to come to market before the end of the year.

The fourth quarter of the year is usually a strategic time in the country for vendors to put their transactions in motion, but the unusually high volumes this year can be linked to several other factors.

For one thing, yields in the commercial property market are below the five-year average by many estimates, making it an opportune time for vendors to recycle their capital and seek growth opportunities elsewhere. Some of the sellers, including Brookfield, are going through a transition period where they are in the process of reshaping and reevaluating their portfolio. As a source close to the deal explained, given the Canadian property firm wants to keep its gearing down, favorable market conditions have prompted it to sell some of its big portfolios to re-divert funds into other development opportunities.

The trigger that encouraged many of the sellers was Morgan Stanley Real Estate Investing’s successful A$2.45 billion sale of the Investa Property Trust to China Investment Corporation (CIC) in July, a deal reflecting a relatively high cap rate of 5 percent.

At the macro level, other drivers of property sales have been low levels of debt, falling interest rates and a depreciating currency. Much of the unemployment generated in Australia’s mining towns has been absorbed into construction activities in the residential sector. This rebalancing has partly mitigated the impact of the commodities slowdown on Australia’s overall economic health.

But the key push behind the selling frenzy is the offshore investor’s burgeoning interest in Australia. Most of these assets wouldn’t be trading at such pricey levels if it was not for overseas bidders. Indeed, in the third quarter of this year, offshore buyers accounted for 56 percent of commercial property sales in the country by value, the highest percentage in a decade, according to CBRE.

For example, the Singaporean sovereign wealth fund GIC began in June the sales process for its 26-property logistics portfolio in the country. The five bidders it eventually shortlisted were all offshore investors, with each entering bids around $1 billion. Singapore’s Ascendas Fund Management is now rumored to have won the prime portfolio for $1.07 billion, beating The Redwood Group and ARA Asset Management.

Justifying the high price paid by Ascendas, a source told PERE that the firm had been looking to enter the Australian market for some time, and given that such large scale deals are hard to find, the firm went all out to take advantage of the opportunity.

The herd of prospective buyers also is not focused solely on the commercial sector. High levels of overseas investments, particularly by Chinese developers and retail investors, in Sydney’s residential market has lured many property owners to withdraw their stock from the city’s central business district (CBD) office market to convert into residential or hotel development projects. Savills has estimated in a report that such potential future withdrawals over the next decade add up to more than 3 million square feet.

Such offshore demand underscores the current dichotomy in the Australian property market. According to brokers, local owners have been concerned about historically high vacancy and incentive levels for core assets in some Australian cities. Nonetheless, they have been able to sell these assets at attractive exit prices, thanks to the crush of overseas buyers. A Sydney-based fund manager further remarked that even though cap rates are compressing, a 5 percent rate for a Grade A core style building still looks appealing to a foreign buyer in comparison to a 1 percent cap rate available from fixed-income assets.

A longer-term issue is where property owners would invest all of the recycled capital once the current tide of assets on sale is lapped up. The stock withdrawal out of Sydney’s office market is estimated to shrink the size of its CBD by 6 percent. Elsewhere too, the net supply pipeline remains constrained in the medium term. That is a key question being ignored amid the current selling boom.