Despite recent headwinds facing Australian commercial real estate, transaction activity has quickly rebounded lead by offshore capital, taking advantage of reduced competition on available buying opportunities despite international travel restrictions. Increased transaction activity comes as no surprise to Colliers International given Australia’s world-leading handling of the global health crisis, sustained weight of capital seeking Australian property and strong underlying real estate fundamentals.

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Australia, like much of Asia has outperformed the rest of the world to suppress the spread of the highly contagious COVID-19 virus, which has allowed easing of social distancing restrictions and increased economic activity ahead of base case estimates. Combined with favourable Government monetary and fiscal policies including large economic stimulus packages, global investment markets have renewed confidence which was been reflected in the recent performance of equity markets – the Australian Stock Exchange All Ordinaries Index has recovered to just 10% below the February 2020 peak after dropping 40% in 4 weeks.

This confidence has spurred greater volumes of commercial real estate transaction activity in Australia, as the market overcomes initial uncertainty regarding the economic impact of social distancing restrictions, tenant rent relief packages, Foreign Investment Review Board (FIRB) changes, availability of debt and future use requirements, particularly in the retail sector.

Colliers International has monitored transaction activity over AUD$20m across all sectors since the peak of the health crisis in mid-March. In just over three months to 30 June 2020, there has been over AUD$6.0b in transactions across almost 40 deals, with AUD$3.8b completed and AUD$2.2b in due diligence. For comparison purposes, annual transaction volumes in Australia have averaged AUD$30b over the last five years.

The trajectory of transaction volumes is very pleasing as the Australian economy returns to normalised conditions and increased buyer sentiment fuels transaction activity. Transaction volumes increased by 70% from May to June, with another 40% increase estimated for July based on reported deals in due diligence. There is an additional AUD$3.5b for sale, with Colliers International currently appointed on AUD$1.0b, including half shares in Poly Global’s premium office projects at 1000 La Trobe Street in Melbourne and 210 George Street in Sydney totalling approximately $500m.

Offshore investors have defied the challenges of cross boarder investment in the current climate, accounting for 56% of Australia’s post COVID-19 transaction activity including the five largest transactions by deal size. At the very peak of the COVID-19 pandemic in late March 2020, Colliers International Melbourne Capital Markets transacted an A Grade office tower at 200 Victoria Street in Melbourne to a subsidiary of Japanese telco giant Nippon Telegraph and Telephone Corporation (NTT) through local investment manager Realmont Property Partners for AUD$72m.

Offshore capital continues to aggressively seek to Australia commercial real estate for the country’s AAA credit rating, high returns, income growth potential and transparent market. Australia is one of just 10 countries in the world to retain a AAA rating, with Singapore the only other from Asia Pacific. On the back of the recent health crisis, offshore demand has been fuelled by increased global capital allocations to Asia Pacific relative to the America’s and Europe, which have not handled the pandemic as efficiently. Australia, Japan and Singapore remain preferred real estate markets in Asia Pacific.

Offshore investment post COVID-19 has been led by Singapore and Germany, with the most sophisticated and established offshore buyers continuing to acquire Australian real estate through local offices and local investment managers who conduct the vast proportion of their due diligence.

At the beginning of the COVID-19 pandemic, Colliers International analysed major offshore acquisitions in Australia during 2018 and 2019 which indicated almost 90% of buyers had a local office or a local investment manager in Australia, leaving only 10% with no local representation. This provided a strong platform for offshore capital to remain highly active despite international travel restrictions.

As a side note, buyer enquiry continues to increase from Hong Kong as tensions with China rise, led by ultra-high net worth’s looking to deploy capital to a more secure and stable environment. If conditions worsen, preferred alternate Asia Pacific locations such as Australia, Japan and Singapore will attract a larger portion of investment.

Across Australia’s commercial real estate market, there is a clear preference for Office and Industrial located in Melbourne and Sydney, with 75% of transaction volumes in the Office and Industrial sectors, and 77% in Melbourne (VIC) and Sydney (NSW).

To date, Industrial appears a beneficiary of the rapidly changing retail trends in Australia, while the office sector has proved very resilient.

While capital stacks remain liquid, equity is being more selective with acquisition preferences focused on defensive investments such as core and core plus rather than higher yielding value add and development opportunities. Essentially, Investors are focused core and core plus Office and Industrial investments in Melbourne and Sydney underpinned by strong lease covenants providing secure medium term cash flows. Colliers International expects this trend to continue for the remainder of 2020.

Pricing has not materially changed with office and industrial yields post Covid-19 generally between 4.50% to 5.00%. Yields at these levels continue to provide one of the highest yields spreads in Asia Pacific between 375bps to 400bps, which is particularly attractive given interest rates will likely remain very accommodating for a long time.

As investors continue to focus on income, buyers have been drawn to Melbourne’s affordable office rents which are coming off a much lower base than other eastern seaboard office markets and offer greater upside. According to Colliers International, Melbourne office rents are up to 40% lower than its main rival Sydney and in line with Brisbane which is a smaller market with higher vacancy and incentives.