Investors seek security in core real estate deals
Recent deals globally reflect cautious-but-confident investment strategies
Commercial real estate investors are betting that premium office buildings in big cities are a good way to ride out economic uncertainty during a pandemic.
In one of the largest office deals globally this year, Chinese sovereign wealth fund China Investment Corporation recently bought an additional 50 percent stake in the 44-storey Grosvenor Place in Sydney for A$925 million (US$676 million), taking its overall holding in the property to 75 percent.
Global insurance firm Allianz spent €500 million (US$594 million) in September on two Paris office towers within the landmark commercial complex Citylights. The deal was the group’s largest ever office transaction in Europe.
Also in September, private investment firm Tristan Capital Partners acquired seven office buildings, which make up AEW’s City Office Germany Fund. The firm believes long-term demand for high-quality offices in prime locations will outweigh any short-term rise in vacancy.
“For investors, security of income has become the most important factor, with long-leased, strong covenant buildings the focus,” says Fergal Harris, head of capital markets – Australia, JLL. The Grosvenor Place deal in Sydney “reflects the strength and resilience in traditional core real estate sectors, particularly at this time.”
But it’s not just offices. Demand is also rising for high-quality assets in the industrial and retail sectors. A JLL survey of 38 investors globally, with a collective US$1.5 trillion (A$2 trillion) of assets under management, found 82 percent are planning to retain or increase their exposure to core real estate by the end of 2021.
Staying close to home
In addition to the hunt for income security, many investors are also pivoting to strategies that focus on domestic and regional markets. Intra-regional activity as a share of total investments globally between July and September climbed to 14 percent – the highest rate seen in more than a decade, according to JLL.
With an expected economic recovery in the Asia Pacific region over the next six to 12 months, Australia, Japan, South Korea and China remain firmly in the frame.
In Europe, domestic yield compression continues on the very best prime assets in Paris, Germany and London. German and French capital accounts for most of the activity, followed by global investment managers, according to JLL.
Large inflows at the start of the year into Germany’s open-ended funds are strengthening their firepower, says Chris Staveley, head of EMEA office investment at JLL.
“In Q3 we witnessed significant investment from domestic and regional capital,” Staveley says. “As investors across the world seek high quality real assets with secure income, we’re reminded how significant a core office investor these funds are across Europe,” he says.
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The Grosvenor Place sale
The vendor in Sydney’s Grosvenor Place deal was Dexus and its wholesale fund the Dexus Office Partner, which each owned 25 percent.
Dexus says the reason for the sale was its limited ability to control the management of the building and therefore generate additional income.
Because of the short-term leasing risk of the building – its weighted average lease expiry is 3.4 years – and 89 percent occupancy, the building was sold at a five percent discount to the property’s book value.
Nevertheless, the sale, which is still subject to approval from the Foreign Investment Review Board, reflects that investment-grade offices remain central to investment strategies.
“Despite the challenges to investing currently, Australia’s attractive yield spread and historically low financing costs are the key factors driving strong offshore engagement and cross border capital inflows,” says Luke Billiau, head of capital markets – NSW, JLL.
“The transaction of Grosvenor Place marks one of the largest office deals on record and will be seen regionally as a vote of confidence for Australia‘s capital markets,” he says.
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