Foreign investors more optimistic on Australian commercial property

Offshore buy searches are slowly inching up and have returned to pre-pandemic levels. Picture: AAP

In the years leading up to the pandemic, Australian commercial real estate was among the most sought after by foreign investors. But just like domestic demand, interest from overseas waned once lockdowns hit.

That’s now changing.

While demand is still subdued relative to pre-Covid levels, this year we’ve started to see activity from offshore buyers creep back.

The first sign of returning demand can be seen in sales activity. Year to date, there’s been $12bn worth of $1m-plus commercial properties sold to offshore buyers, according to Real Capital Analytics. That’s a 40 per cent rise compared to the same period last year.

These figures were propelled by the $3.8bn purchase of Blackstone’s Milestone logistics portfolio by global investment group ESR, which was the largest direct property sale ever transacted in Australia.

Sliced differently, we can see offshore buyers have been behind more than a third of total $1m-plus commercial transactions this year – the highest proportion in more than a decade.

Offshore demand has been strongest from Singapore, which accounted for more than double the number of transactions of the next largest source of offshore capital, Hong Kong. The US followed, with Canada and France rounding out the top five.

When it comes to where foreign investors are looking to buy, Australia’s east coast is the most in demand, accounting for more than 80 per cent of offshore searches on realcommercial.com.au over the past 12 months.

Victoria has seen the strongest demand, accounting for 30 per cent of the national share of searches from offshore. Victorian industrial properties have also been the most-searched for assets by offshore buyers.

NSW followed with a 27 per cent share of searches, though this cohort were more interested in retail properties. Queensland was just behind with 26 per cent of the share. Industrial properties again the most sought after.

In Western Australia, land and development sites were the most in demand – the only state where retail or industrial didn’t come out on top.

Search activity is worth looking at because it pre-empts the trends we see in market. While sales volumes remain below historic levels, offshore buy searches are slowly inching up and have returned to pre-pandemic levels over recent months. Sales will follow in time.

So, what’s driving the recovery in offshore demand for Australian commercial property?

Following the first lockdown last year, Australia’s economy bounced back faster than most developed countries. By June this year, both the size of Australia’s economy and the number of employed persons – key signals of demand for commercial property – were above pre-Covid levels.

Despite the current economic challenges faced by the Delta variant, our track record of recovering from lockdowns appears to be supporting investor confidence. The improved rollout of vaccines is probably also having an impact.

The fact that offshore buyer demand has continued to grow despite our closed borders, speaks to the strong appeal of Australian commercial property. As we move closer to reopening, this demand is only likely to grow.

Anne Flaherty in an economist with REA Group