It was a quiet 2020, but a wave of foreign capital is expected to hit Australian shores in 2021. Where are foreign investors looking? It appears to be office property. Here are four reasons why.
In 2020, foreign investment into Australian office property accounted for 63.4 per cent, or $6.15 billion, of Australian office transactions. And that was during a year which recorded the lowest overall investment in office properties that Australia has seen since 2012 (thank you COVID-19).
The ten-year average for office property investment sits at a low 44.2 per cent but recent years have dwarfed this figure with a rising amount of investment.
So, why is it that more offshore buyers – irrespective of what hurdles the pandemic restrictions have been erected before them – are turning to office property investment?
For starters, office is a well-known asset class with proven returns. It’s stable, and because of a track record of success by many multinational investment companies and unlisted property trusts, some experts deem it safer than many alternatives.
But perhaps it’s not just the physical aspects of the prestigious investment class that turns many heads in its direction (after all, many of these large investors operate out of high-quality office buildings themselves). It’s also because of the exceptional tenants who occupy them.
With a new calendar year well underway, and with investors coming out of the shadows since the pandemic hit Australian shores in 2020, it’s a good time for investors to look ahead.
Here are 4 likely reasons why foreign investors will invest in office property in 2021:
1. The office sector is defensive by nature
In 2020, only $2.29 billion worth of office assets in Australia were sold by offshore capital sources (compared to $6.15 billion worth of acquisitions).
Office property owners are sometimes known to hold their assets for longer periods of time than other assets. This is due to few office assets coming online throughout each year in Australia, so the chances of reinvestment in other premium office opportunities are reduced (low supply can create high demand).
Many divest from their office buildings in search of other asset classes they may believe are trending better (industrial and logistics assets provided a solid alternative to some office investments in 2020) or to retire on the capital gains made from a steady incline in office property values over the many years they’ve retained ownership.
A low volume of transactions reduces the market’s volatility, and thus reduces the risk of sudden changes to property values. It’s a key reason why many offshore investors, who are sometimes conservative by nature, invest in office assets.
2. Flexible usage entices more tenants
Many office buildings these days, particularly in suburban districts, are zoned ‘Mixed Used Business’.
Owning a mixed-use building means a landlord can make the most of their asset. They may be able to fill the premises with tenants whose businesses push beyond the definition of ‘white collar’, for example with medical centres or car dealerships. Or perhaps they can provide occupancy to one sole tenant, whose business activities exceed the typical day-to-day of accountants, lawyers, or financial planners. For the landlord of a mixed-use building, it means diversification of their property’s tenancy profile.
A property with flexible usage also means landlords can cast a wider new when looking for their ideal tenant.
Say they’ve found a tenant looking to use their space for a showroom, amusement centre, or an eating establishment. Or perhaps they’re even involved with some form of minor industrial activity (providing they’re not a nuisance or will be a detriment to the health and safety of the local precinct). If the property allows mixed-used business, then landlords can accept applications from any of these prospective tenants.
In a game where tenants are the key players (remember, they pay the rent and often pay the property’s outgoings), being able to offer occupancy in an office property to a greater number of prospects could increase the chances of success.
3. Office is still relevant
Though some forecast a reduction of as much as 10 per cent to 15 per cent in annual net absorption in Australia’s office market as work-from-home rates increase, there is a louder call by business owners to preserve company culture.
Those businesses who have survived COVID-19 put team culture and a centralised team location as crucial to their future success, as shown in a recent survey by the Property Council of Australia (PCA).
According to the PCA, office space is likely to remain relevant due to the importance office occupiers and owners place on a central location for their workers.
Of the respondents in PCA’s survey, 96 per cent see the role of physical office space as key to creating a corporate culture. Many say the physical office environment is a crucial driver of job satisfaction, productivity, and collaboration.
Foreign investors are taking note.
4. Business confidence resuming in Australia
With COVID-19 behind many Australian businesses, there’s a call to action (led by the Australian Federal Government) for worker bees to return to the hive. The message sent from the top, is that we should head back to work – back to the computers, back on the tools, and back behind the registers – and get the economy moving.
Well, the call has been heard, and action has followed. That’s why business confidence around the nation is sky-high. Take the west coast as an example.
WA has seen its fair share of office market disappointment in the last decade. However, there’s a beaming light on the horizon. At least that’s what local businesses are saying.
Business confidence in WA has risen to its highest level since 2007.
This huge announcement by WA’s Chamber of Commerce in December 2020 was driven by a massive rise in the proportion of WA businesses expecting stronger economic conditions in the near-future.
Overseas pundits watch for these headlines. And right now, Australia (with WA leading the charge and becoming crowned best economy in the world during COVID-19 pandemic) is in the spotlight as a strong economy and very worthy of overseas investment. Office real estate, as we’ve shown why, will be a target for many international players in 2021.
Will it be a target for you?
Want some help finding success in office property investment? Read our hugely popular blog post 5 rules for successful office property investment (in any market).
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