Private property investors, be they individuals or syndicates, emerged as the second-largest buyers of office property in 2011, taking advantage of a depressed market in which listed property trusts and big institutional investors have been less active.
The message to investors in the market for sub-$20 million office assets is to get in before the big boys come back and drive rental yields back down again across the board.
Private domestic investors swallowed up just over 30 per cent of all commercial property transactions in 2011, behind only offshore individuals and institutions, who together represented 42 per cent of last year’s buyers, Colliers International reports.
Domestic individuals and syndicates typically generate only 20-25 per cent of activity, CBRE head of global research and consulting Kevin Stanley says.
The “missing piece of the jigsaw” at the moment are Australian listed property trusts (A-REITs), which in a typical year used to buy 40-50 per cent of commercial property.
That dropped below 10 per cent in calendar 2011 as A-REIT managers turned inwards to sort out their problems of debt overhang and share prices stuck stubbornly below net tangible asset backing.
Not only do private investors therefore have more of the market to themselves, they also have a wealth of potential opportunities to choose from.
“In that sub-$20 million part of the market, there’s still a lot of property on the market – more than there are buyers,” CBRE’s Stanley says.
“There’s still a lot of supply being fed through by receivers. Private investors can afford to be selective, they’re not just buying it all.”
The buyers’ market is reflected in the initial yields on offer for A-grade buildings outside major central business districts, which in many cases are near or even above 9 per cent (see yields table).
It must be said that many of these markets also have relatively high vacancy rates (see vacancies table), with the exception of West Perth.
CBRE forecasts that Perth’s office market will be among the first in Australia to recover its pre-global financial crisis value (Melbourne and Adelaide are the others) and investors appear to be taking notice.
The head of Charter Hall Direct Property, Richard Stacker, says 80 per cent of the flows into his funds are coming from self-managed superannuation fund investors.
“Advisers and investors are looking for alternative investments that have a return profile that is less correlated to equity markets,” he says, pointing to the growing spread between term deposits and direct property, which now sits at 3 to 4 per cent after the recent lowering of interest rates.
A Charter Hall trust, which owns 144 Stirling Street in the Perth CBD – fully let to engineering company Hatch and the West Australian government – promises a first year income yield of 8.85 per cent, with a minimum investment of $50,000.
CBRE’s Stanley also recommends Darwin for sub-$20 million investors.