Singapore corporates on the prowl for properties in Australia

Singapore

SUSTAINED yield differentials between Australian real estate and assets in the mature markets of New York, London, Paris and Tokyo are set to keep Singapore corporates on the prowl for properties in Australia.

Singapore companies have already shelled out US$1.85 billion in Australian real estate last year amid a slowdown in their domestic market. This makes Australia the top overseas real estate market for Singapore companies. It is trailed by the UK, China, Malaysia and South Korea.

Citing data from JLL which tracks corporates' real estate investments (including office, retail, hotels, industrial and residential) of at least US$5 million in value, HSBC Australia head of commercial banking James Hogan told reporters on Tuesday that this trend is expected to continue, predicated on several reasons.

Falling borrowing rates in Australia and a weaker currency have drawn offshore capital into Australian real estate. Mr Hogan said the low interest rate level is forecast to continue in the medium term, lending support to real estate demand and capital values. A strong population growth is also bolstering demand for residential, commercial and other operational real estate.

Since 2011, inbound investment by overseas investors accounted for slightly more than half of asset purchases in Australia, based on JLL figures.

While greater competition for assets in Australia has bidded up asset values and compressed yields, Mr Hogan observed that Sydney and Melbourne office yields are still attractive for overseas investors compared to assets in other major cities. For instance, the yield spread between Sydney and New York on comparable assets is still about 250 basis points.

"Australia is becoming a place of choice for Singaporean companies looking at commercial real estate," said Steven Cranwell, head of commercial banking at HSBC Singapore.

In contrast, Australian companies pumped only US$192 million into Singapore real estate, based on JLL's data as of Sept 30, 2015, making Singapore a distant second overseas real estate market for Australian companies after the US market which drew S$2.35 billion from Australian corporates last year.

Conventional financing for such overseas acquisitions has typically been undertaken through onshore loans in Australia, secured by mortgages over the respective properties, Mr Cranwell explained. Other forms of financing include bond issuances or equity-raising by corporates in their home country.

Bond issuance by real estate companies facilitated by HSBC Singapore stood at S$625 million in 2015, a slight dip from S$650 million in 2014. Over 70 per cent of these funds went into overseas markets in China, Australia, London and Thailand.

"While onshore financing in Australia is still the preferred solution, in some cases we see corporates considering vanilla and/or project bond issuances as alternative financing solutions," Mr Cranwell said. Family offices and private equity firms are also increasingly interested in mezzanine and hybrid funding options that can potentially boost return on equity.

Last year, a slew of acquisitions by Singapore companies were inked. Among them, Straits Trading Company agreed to acquire an office building in Melbourne for A$125 million (S$125.34 million); Starhill Global Reit acquired Myer Centre Adelaide for A$288 million; Ascendas Real Estate Investment Trust snapped up 26 logistic warehouses from GIC and Frasers Property Australia for A$1.01 billion; and Far East Organization and its Hong Kong-listed sister company Sino Land scooped up The Westin Sydney for A$445.33 million.

Growth in residential prices, which surged 52 per cent in Sydney and 20 per cent in Melbourne since 2011 despite measures by the Australian government to tame foreign demand, remains encouraging for foreign developers. Singapore's Ho Bee Land is currently constructing two residential developments, one on the Gold Coast and one in Doncaster in Melbourne.

Less conventional real estate assets have also caught the attention of investors, Mr Hogan said. They include storage space, student accommodation, healthcare facilities, education and retirement villages.

These are traditionally held by private investors but more institutional and overseas investors have started to look at these asset classes due to their attractive yields. Prime initial yield for student housing in Australia, for instance, stood at 7 per cent in 2015, compared to 5 per cent in Germany and the UK.

While the overseas investments of Singapore developers have expanded over the past few years, Mr Cranwell believes that there is pent-up investment demand in their domestic market.

"We are already starting to see their investments flow back into the market," he said. "Certainly with regard to some of the land sales that occurred in more recent times, there is a lot more local interest in those land sales, not just local interest but also foreign interest flowing back to the market."