Deals freeze up in one of Asia's most lucrative office markets

[SINGAPORE] Dealmaking in Australia's office market has plunged by the most since the global financial crisis as owners hang on to assets that are among the highest-yielding in the region.

Commercial property transactions in Australia fell 57 per cent to US$7.5 billion in the six months ended June 30 from a year earlier, according to Real Capital Analytics, Inc.

That's the biggest drop since the first half of 2008 and the steepest decline among Asia's top five investment markets, the data showed.

Australian offices offer yields almost twice as much as those in Asian markets such as Singapore and Hong Kong, making Australia an appealing investment destination for foreign buyers.

Those high yields are also making owners reluctant to part with them in a low-return environment, according to Petra Blazkova, a London-based senior director of analytics for Asia Pacific at Real Capital. Office prices in prime markets are at or above "past cyclical highs" amid investor demand and scarce supply, she said.

"Australia has been considered an investment haven as there is plenty of money chasing quality assets in this low interest-rate environment," Ms Blazkova said. "The spread remains attractive for foreign investors, but they will find it hard as the majority of prime stock is owned by well-capitalised domestic players with little incentive to sell. These assets are rare to find in the current climate."

Foreigners accounted for 43 per cent of acquisitions in Australia in the first half, compared to 17 per cent in Japan and 28 per cent in China. Only Hong Kong and Singapore had a higher proportion of foreign deals among the five biggest markets, according to Real Capital.

"In a world where fixed income investors are facing over US$14 trillion of investment-grade bonds trading at negative returns, long-dated stable cash flows underpinned by good quality tenants from real estate assets such as those seen in the Australian office sector are much sought after," said Priyaranjan Kumar, regional executive director of capital markets for Asia Pacific at property consultant Cushman & Wakefield Inc.

Longer leases in Australia that range from 7 to 10 years also make it an attractive market for holding stable long-term, recurring-income assets compared to other Asian markets where lease tenures are shorter, Mr Kumar said.

Australian office assets currently yield about 6 per cent, compared with 3.5 per cent in Tokyo and Singapore and 2.5 per cent in Hong Kong, data from Cushman showed. Pricing for prime office assets across Australia are at their highest levels since the financial crisis, Mr Kumar said.

The biggest deal in Australia's commercial property market in the first half was Investa Property Group's purchase of a Sydney office block for US$447.4 million. Last year's largest transaction was a US$663.8 million purchase of an office block in Melbourne by Blackstone Group Inc.

BLOOMBERG