Commercial property investment to grow 7% during 2011 as funds target non-CBD assets

Commercial property investment in the Asia Pacific region reached a record $US145 billion during 2010, dwarfing the two previous years and setting the market up for a stellar performance in non-CBD properties during 2011, new research from DTZ has found.

Australia is also preparing for a solid year after some weakness in the commercial property markets, with the market set to record 7% growth with investment reaching $16 billion from $14.6 billion in 2010.

But inflation and interest rate fears could dampen those secondary markets during the next 12 months, the research has warned, despite an otherwise healthy economy.

“We’re seeing no reason why this year shouldn’t be as buoyant as 2010,” DTZ head of Asia Pacific research David Green-Morgan says. “We saw good transactional levels of activity last year and this should happen again.”

“If you ignore the impact of the floods in Queensland and Victoria, we think that 2011 should continue to be a great year on the investor side.”

As the economy improves and interest rates begin to rise, Green-Morgan says overseas investors will become more interested in the Australian market – specifically wealth and pension funds.

DTZ expects total Asia-Pacific investment this year to come to $US155 billion, although Green-Morgan says the take-up will be in non-core markets with more CBD assets having been snapped up during 2010. He says the attractive pricing of those properties outside the CBD will convince investors to take risks.

“We think there’s going to be a lot more activity in those regional shopping centres and officers. There will be a lot more stock on secondary markets. There isn’t really a lot of stock in these core markets, because given the economy looks so strong in 2011, that will give investors’ confidence they can take risks in non-core markets.”

“The pricing there is still pretty attractive for investors if they’re prepared to take some more risk. They tend to be slightly lower quality, and the creditors mix can be slightly more risky – you won’t get the blue chips in these buildings. But you would have a more diverse tenant mix.”

Green-Morgan also says industrial sectors are currently in their main recovery cycle, with investors including pension funds and sovereign wealth funds likely to be on the lookout for a bargain.

But he also says those investors will be more-or-less forced into those secondary markets, as they plan to hold on to CBD properties while prices remain so low.

“I don’t think we’ll see a rush for owners to sell their prime properties. They want to rework their portfolios by getting rid of some of those secondary assets. But the only way we would see landmark properties being sold is if there was a real surge in prices.”

“Unless they’re looking to sell some assets to pay down debt, they won’t do it. Because what are going to replace it with? No one is going to sell their other core properties they’re holding onto so tightly.”

Part of DTZ’s outlook is also based on the fourth-quarter figures, released this week. Domestic investors dominated, accounting for about 88% of overall activity, with the average deal size pushing above $US70 million for the first time ever.

During the last three months of 2010 there were also six deals measured over $US1 billion, with another six over $US500 million. However, there are some short-term threats. Green-Morgan says the floods will have an impact in the Brisbane CBD, possibly slowing down transactions.

Other threats include rising interest rates and currency appreciation, which present some downward risks for growth. As a result, Green-Morgan expects some more M&A activity.

“We think there will be some more activity in mergers and acquisitions this year, possibly some in the listed sector although more in the unlisted sector.”

“The greatest competition in the region in 2011 remains China and Japan, which, between them, make up approximately 50-60% of all transactional activity each quarter.”