Rising US debt costs attracting offshore capital

Rising US debt costs attracting offshore capital

20 April 2018

Rising US debt costs and attractive returns on Australian property are luring overseas investors down under, reports The Australian.

“People are very nervous about investing in the US despite the Trump growth as there is no spread between the cost of debt and yield, and rental growth is about the same (as in Australia),” said Charter Hall chief executive David Harrison.

In another major shift, cross-border capital flows for industrial property now exceed those for retail assets.

“Globally, capital is seeing a reallocation away from retail and into logistics,” he said.

“We have the opportunity to use capital in partnerships or in our pooled funds,” he added, citing the strong appetite for Australian industrial property.

Speculation is rife that Charter Hall is positioning itself to emerge as one of the country’s leading providers of real estate debt by means of a $1.5 billion fund.

The group recently flagged its interest in the field, which is drawing international heavyweights such as US giant Goldman Sachs and local players such as 360 Capital.

According to Macquarie Equities analysts, the plan could be financial winner by boosting the fund manager’s earnings with new performance fees, says the AFR.

“While it may take some time to reach critical mass for the debt fund, we estimate the creation of a $1.5 billion debt fund would be around 2.1 per cent accretive to earnings on a full-year basis,” the analysts wrote.

“Further upside exists if a performance fee structure is implemented. We estimate around 2.6 per cent in total,” they added.

Macquarie estimates that bank lending to commercial real estate in Australia was worth about $17bn.

While Charter Hall is coy about any potential structure details, Macquarie suggests it could focus on properties it did not own, in institutional-grade properties spanning retail, office, and industrial.

International investors face stiff competition from other industry players who are flush with cash.

Local industry superannuation fund REST, for example, expects to invest about $5 billion in commercial property in Australia and globally over the next decade, notes The Australian.

The fund allocates about 9 per cent of its assets to property, and with total funds under management of about $50bn expected to double in the next seven to 10 years, it will look to invest about another $5bn in the sector over that time frame.

REST general manager of investments Brendan Casey admitted finding good opportunities is difficult in the current pricey market, but he is upbeat about growth prospects in the student accommodation and build-to-rent sectors.

Last week REST agreed to buy a $900 million stake in AMP Capital’s $3bn Quay Quarter Tower project in Sydney, which will now start construction.

Chief executive of New York-listed real estate services giant JLL Christian Ulbrich agrees an “almost endless” sources of debt funding will continue to stoke investment, adds The Australian.

Mr Ulbrich, in Australia this week, expects investment to continue to flow into real estate on the back of low interest rates, expanding pension systems, and the continued availability of funding.

“There are hundreds of different debt funds which are available, also insurance companies and pension funds which have come in to provide financing,” he said.

“It’s almost an endless number of sources where you can get debt today, which before the great financial crisis, was very much focused on banks.”

The JLL Australian Office Investment Review reports demand from global investors remains unsated with $6 of capital chasing every $1 worth of Australian office towers, adds The Australian.

Offshore investors accounted for half of the office property deals last year, said Rob Sewell, head of office investments.

“The net capital flow into the Australian office sector over the past five years (2012-2017) was $24.2 billion. To put this figure in context, we estimate the market value of the 19 CBD markets in Australia is approximately $260bn,” Mr Sewell said.

“The market value of non-CBD office markets is estimated at $65bn, so we expect to see these markets as viable investment ­destinations in 2018 for a diverse range of capital sources.”

Overseas investors are increasingly looking beyond Australia’s major East Coast cities to the country’s other CBD markets, says JLL.

While Sydney and Melbourne continue to attract record-breaking capital from both local and offshore investors, stock restrictions are encouraging investors to increase their exposure to Adelaide, Brisbane, and Canberra.

“Offshore groups are finding it increasingly challenging to deploy capital in the core eastern seaboard markets, especially in the A$150 million to A$250 million price point where liquidity is exceptionally deep,” said Stuart McCann, JLL’s Head of International Capital, Australia.

JLL saw more than A$24 billion of offshore capital bid on all of its major campaigns in 2017. A$21.3 billion of this capital failed to find deployment.

As a result, foreign investors are casting their nets wider, looking to markets such as Adelaide where they can “gain exposure to higher yielding prime grade assets which are also underpinned by very defensive capital value rates per square metre,” explained McCann.

The trend is playing out across the world, with high prices in gateway markets forcing investors to look to cities they previously wouldn’t have considered.

“Foreign investors will continue to pursue higher-yielding investments and gain deeper understanding of markets outside of the key gateways—both in Australia and globally,” says McCann.