Global uncertainty expected to fuel local commercial investment and REIT market growth

Australian commercial property is becoming an increasingly sought-after commodity among global institutes and private investors, as financial uncertainty in the US and the UK spur conversations about recession.

After experiencing a downturn during pandemic lockdowns, coupled with a drop in market sentiment off the back of repeated interest rate rises, well-established private players from the international marketplace are beginning to circle the local $165 billion Real Estate Investment Trust (REIT) sector.

New insights from financial services group, Citi Australia, suggests that net asset values are equalising, and when combining this with the prospect of further rate hike pauses, these improving conditions could lead to a flurry of aggressive merger and acquisition (M&A) activity among private capital managers, once debt markets open up.

How are Australian REIT stocks faring?

Out of the 49 REITs listed on the Australian Stock Exchange (ASX), currently there are 24 A-REITs in the top 200 stocks – with 15 of these now having third-party capital mandates in place and earning funds and asset management income.

Further to this, there are a further six A-REITS that are externally managed, which underscores this increasing international buy-in to the local sector and demonstrates significant confidence in the asset class.

According to Citi Australia’s insights, Australian REIT stocks are trading at a 17.9 per cent discount to their net asset value – better than those in other leading markets including the UK, Hong Kong and Europe.

When considering this performance with the 5.7 per cent dividend yields local REITs enjoy (the second highest in the world behind Europe), it makes Australian REITs a very attractive investment opportunity for private capital managers from abroad experiencing more challenging market conditions.

How does the Australian market stack up globally?

When looking at Australian commercial property and REITs with an international lens, the local market provides significant value in comparison to leading markets including the US, Europe, the UK and Hong Kong.

In fact, you could even go as far as saying it is inexpensive from a valuation-standpoint, while enjoying lower downside risk when considering Australia’s seemingly stable economic environment and outlook.

When could we notice increased M&A activity?

There may be some water to go under the bridge until we observe an up-tick in transaction activity, however the stage is certainly set for big takeovers and investments in Australia among cashed-up private capital managers.

Surges in buy-in for alternative property asset classes, like the Australian build-to-rent sector, are also expected to add extra fuel on the investment fire, further boosting activity among prospects from Europe and the US where the emerging property model is more established than it is locally.

We believe the spike in activity could occur towards the end of this year, as international players continue to observe different economic conditions globally, monitor potential interest rate increases by the Reserve Bank of Australia, as well as assess valuations across both established and emerging capital city markets.

If you are based internationally and would like to learn more about the local REIT market, commercial property asset opportunities in Victoria, or would like to discuss a separate property matter, please reach out to us at info@jonesre.com.au.