APAC investors remain focused on yield spreads as investment intentions move away from capital appreciation strategies, according to the latest research from CBRE.
The search for diversified yields is driving investors to more mature regional real estate markets like Australia and Japan, while simultaneously diversifying away from traditional markets including Sydney, Melbourne and Tokyo, according to the global property firm.
CBRE’s latest report found that ‘overcrowding’ in the Sydney and Melbourne markets, which has seen yields compress by 140 – 150 basis points over the past four years, is bringing more risk adverse cities such as Brisbane, Adelaide, Canberra and Perth into focus.
Stephen McNabb, CBRE’s Australian head of research, said these markets could offer investors yields of between 100 and 200 basis points above those in Sydney and Melbourne, in addition to less buyer competition.
“As the Sydney and Melbourne markets reach their peak in terms of yield, investors are looking for new locations – in particular markets that offer a higher yield spread,” McNabb said.
McNabb said the gradual improvement of Queensland’s economy, which has been gaining momentum over the past 12 months, is making Brisbane look more attractive – particularly given the yield in prime assets of six per cent to 6.5 per cent.
“Office vacancy is forecast to drop below 10 per cent by the end of 2019, which will support rental growth and ultimately yield compression,” he said.
According to CBRE, Brisbane is expected to be the first tier II office market to see a recovery in 2017, amid solid flight to quality activity. Adelaide and Canberra are set to follow with both markets stabilising, while Perth will lag with rental growth not expected until at least 2018.
“For every year we spend above trend, the cycle tells us we spend one year below trend. After five years above trend, Perth is now in its fourth year below trend,” McNabb said.
“Capital injection in Perth is expected to increase over the next five, with investors now focused more on relative income yield as the main motivation for investment.”
CBRE Research attributes the search for yield to broader participation of institutional investors, including sovereign wealth funds (SWFs), insurance companies and pensions funds, which collectively invested US$22.5 billion first time into Asia Pacific real estate between 2013-2016. With the relaxation of outbound investment regulations for insurance companies in China, Taiwan and South Korea, CBRE Research also anticipates sustainable interest in high yielding, yet longer-term, returns to match liabilities.
Bruce Baker, CBRE’s executive managing director, capital markets, Pacific, said Australia remained a compelling investment destination, with investors looking further afield from Melbourne and Sydney for opportunities.
“The favorable commercial yield spreads in Australia’s two largest cities confirms their status as among the most consistently sought investment markets in Asia Pacific,” Baker said. “But given intense competition and limited available stock in Sydney and Melbourne, investors are now more willing to move up the risk curve into less familiar but stable markets like Brisbane.”
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