RCA Insights

What Does Dimmed Cross-Border Interest Mean for Pricing in Australia?

By on April 4th, 2018

Cross-border investors garnered the smallest share of Australia’s commercial property market in three years at the close of 2017. The debate for many is what this dimmed appetite for deals means for pricing in Asia Pacific’s third largest market.

Australia has received the largest volume of cross-border capital in Asia Pacific throughout this cycle, with $95.6 billion invested since 2009.  These inflows have been declining since early 2016 and in Q4’17 the cross-border share of all acquisitions in Australia dropped to 35%.

One factor in the decline is the capital controls imposed on Chinese cross-border investors. Chinese investments in Australia peaked in mid-2016 and have been falling since. They are not net sellers yet but inbound capital dropped by 53% year-over-year in 2017. Additionally, direct acquisitions by U.S. investors – the third largest foreign investor group in Australia – declined by 45% YOY.

1804 Australia CB pricing

With Asian investors’ reputation as the most aggressive bidders in Australia as well as their focus on prime products, the weight of their capital has contributed to a shift in pricing. On average, Asian investors have bought 80 bps below domestic buyers throughout this cycle.

The waning slice of cross-border capital has not had an impact on yields – yet. Average office and retail yields compressed by 75 bps in Sydney and by 20 bps in Melbourne in 2017 to reach historic lows.

The change in the buyer mix has had an effect on the liquidity of markets, however. And the link between yields and RCA’s Capital Liquidity Scores may offer a signal to the potential impact a change in liquidity could have on future pricing. (This analysis of U.S. markets shows that for every point drop in liquidity, a market’s yield is expected to increase by almost 3 basis points.)

Liquidity score data for Q4’17 shows that the scores for both Sydney and Melbourne have deteriorated since Q2’17. Sydney has slipped one place in the global liquidity score rankings to 11th and Melbourne has sunk three places to 20th.

With pricing at record highs in Australia both domestic and cross-border investors are becoming more cautious. The pressing question is whether the forecast strength of the Australian economy is enough to push prices further or whether price growth will start to plateau as the composition of buyers shifts.

The new RCA Capital Liquidity Scores report with Q4’17 results will be released on April 12. The next Asia Pacific Capital Trends report will be released in May.