Foreign investors set sights on commercial property

by Julia Corderoy22 Sep 2014
It’s no secret that foreign investors have a love affair with Australian residential property, but now they are setting their sights on commercial property.  

New research by the Reserve Bank shows that foreigners accounted for around one-quarter of the value of commercial property purchases in Australia since 2008, up from one-tenth in the previous 15 years.

Foreign commercial property investment increased sharply in the mid-2000s, and has now exceeded foreigners’ sales in each year for almost a decade, according to the report.   

The report also reveals that the market hit a peak in the first half of 2014, making up 40% of the value of commercial properties which were sold. Net purchases by foreigners (which also account for sales) amounted to $4 billion in the first half of 2014 – close to its level for the whole 2013 year.

Foreigners tend to favour existing buildings, which according to the RBA “reflects foreigners’ desire for commercial buildings as passive investments, valuing both their relatively predictable income stream and the low correlation between their prices and those of other assets.”

The Central Bank says that the increased demand by foreigners has had many positive effects on the Australian economy.

“Foreigners have been active in purchasing lower-quality office buildings to convert to apartments, particularly in and around the Sydney CBD. This activity is likely to help alleviate the shortage of land, and raise the stock of housing in areas where demand for housing is strong…”

“Foreigners have also purchased existing buildings from domestic firms that went on to ‘recycle’ this capital into the development of other new buildings in Australia. By providing funds and pushing up capital values, foreigners have effectively supported the financial position of domestic developers and enabled them to undertake additional construction activity.”

However, the greater foreign presence also leaves the Australian economy more at risk to global economic developments.

“The greater foreign presence potentially adds to the sensitivity of capital values to variations in economic conditions overseas. For example, an adverse shock overseas could cause foreigners to try to divest Australian assets to cover liabilities offshore,” the RBA says.