15 June 2005
For investors, the race is on to find the best property investment opportunities the world has to offer, according to the annual Macquarie Property Market Outlook (Outlook) presented in Melbourne today.
Macquarie Property Research has shown for the first time that during all stages of the property cycle, diversifying by adding international property to an Australian property investment portfolio can significantly increase returns and decrease risk. The model shows in Australia's bust in the early nineties, an investment portfolio which included select international property investments achieved significantly higher returns than a portfolio investing in Australian assets only, with the same or reduced risk.
"Australians are increasingly looking offshore for attractive property investment opportunities," says Head of Macquarie Property Research, Rod Cornish.
"The case for global diversification over the long term is strong. Our models show that in a boom, a bust, or even in a long period of similar conditions, an investor with global real estate assets would have significant improvements in risk adjusted return and increased returns overall.
"Globally, the increasing attractiveness of property and greater capital mobility have made cross-border investing more popular. We believe the transformation in global property markets is both cyclical and structural," said Mr Cornish.
"By taking advantage of lags in timing in the different property and economic cycles, an investor can insulate a portfolio from some of the domestic ups and downs.
"We are strong believers in cycles and on balance cycles are here to stay - even considering shifts in major leading indicators including the influence of the global real estate markets, the future will be more like the past."
Office markets are an attractive investment opportunity with potentially higher returns although this does not mean boom conditions. The office sector has responded as predicted last year and demand is now in an upswing, in line with the global office sector recovery. "Leasing demand has been the strongest in four to 15 years in Australia's major capital city CBDs," said Mr Cornish. Net absorption, the net take up of office space and a measure of leasing demand, was 140,000 square metres in Melbourne's CBD almost triple the long term annual average. In Sydney's CBD in the 12 months to 31 March 2005, net absorption was 50 per cent above the long term average at 100,000 square metres. The risks are a slowdown in the domestic economy, the impact of any future significant interest rate movements on the business cycle and Sydney's CBD recovery which has lagged other states - to some degree the office markets have felt this over the last couple of months.
In Melbourne, the office sector recovery was delayed due to new construction although demand is proving to be stronger than many expected. "We can expect vacancies to rise to about 10 per cent which is well below some industry forecasts of 15 per cent," Mr Cornish said.
For the industrial sector, infrastructure is the main driver. Distributors are seen to be looking for well placed locations near new and emerging infrastructure. New roads and high prices for prime locations are causing shifts in this sector. For example, in the Dandenong area in south east Melbourne, industrial land values have risen 40 per cent due to the Mitcham-Frankston Highway, values in Arndell Park near Sydney's Westlink M7 by 23 per cent and at Eagle Farm in Brisbane's Gateway precinct by 44 per cent. Now, the strong land value growth in 2004 and recent increases in construction costs are affecting development and it is predicted that in most locations land value growth will not be as strong as the exceptional increases of last year.
In the retail sector, Australia is reaching a peak with more moderate, but relatively solid returns expected from 2006. "As we forecast, retail spending has tailed off due to long term cyclical factors which will flow through to more moderate rental growth," said Mr Cornish.
"All property investors, regardless of size or appetite for property assets, should consider international property for investment opportunities and trends in the coming year," said Head of Macquarie Property, Stephen Girdis.
"For many people, international property is out of reach. There are also practical challenges to cross border investment for example, culture, currency, tax and legal jurisdictions. So how do investors invest in international offices and infrastructure? Most people don't go out and buy a multi-storey office block or an industrial park outside Australia. Indirect ownership provides a number of options - for example, listed property trusts are a convenient way for investors to take advantage of these opportunities," Mr Girdis said. "Other options include syndicates, wholesale and development funds.
"Macquarie is well positioned to be a global facilitator for cross border investment for many investors, large and small."
Most Australian residential markets peaked 18 months to two years ago and subdued investment returns are expected over the next few years. The residential property sector is vulnerable to interest rates and government policy and markets have softened as predicted. Over the next 12 months, the Outlook predicts a residential property sector marked by uncertainty, flat or moderate capital city price movements and continued price drops in weak areas. One exception is Perth which is forecast to offer the most solid growth.
Residential property in Melbourne, like Sydney, has been weak but with more moderate price drops than in previous cycles. Macquarie Property models show prices dropped more than the underlying drivers would suggest. "The Melbourne residential market fundamentals are more solid than the price falls imply. Negative commentary, particularly about the oversupply of city apartments, has affected overall confidence," Mr Cornish said.
The Macquarie Property Market Outlook report has been produced for the last six years. In that time, it has predicted trends in the property market including the influence of the baby boomers, the move to community lifestyle property, the move to apartment living, the out-performance of industrial property located around new and emerging infrastructure, the surge in residential property in south-east Queensland and Perth and last year the softening of residential markets and the resurgence of office markets.
For further information, please contact:
Head of Macquarie Property Research
Tel: (61 2) 8232 3333
Snr Communications Mgr
Tel: (61 2 ) 8232 3333
Mobile: (61 ) 416 237 358
This document has been prepared by Macquarie Bank Limited ABN 46 008 583 542 for general information purposes only, without taking into account any potential investors' personal objectives, financial situation or needs. Please consider your own financial situation, objectives and needs and obtain financial, legal and/or taxation advice before making any investment decision.
Whilst care has been taken in relation to the accuracy of contents of this document, no warranty as to accuracy or correctness is given nor should one be implied in respect of any of the information provided in this document.