Office assets set to outperform

OFFICE assets will outperform retail property in the medium term, while overseas investors continue to seek assets in defiance of the strong currency, according to AMP Capital.

By InvestSMART · 30 Nov 2011

By InvestSMART ·
30 Nov 2011

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OFFICE assets will outperform retail property in the medium term, while overseas investors continue to seek assets in defiance of the strong currency, according to AMP Capital.

The year ahead will also be dominated by the volatile economies of Europe and a forecast slow upturn in the US.

Andrew Bird, director and chief investment officer at AMP Capital, said investors remained cautious and it was difficult to predict the outcome of debt problems in Europe and the US.

He said during the global financial crisis, governments bailed out the private sector, but, as evidenced in Europe, the tables had turned, though it was doubtful the private sector would bail out any government.

"The share market and bond market are giving mixed signals, which has flowed through to the property investment market," Mr Bird said. "It is difficult to see the Republicans doing President Obama any favours next year, which will make it tough in the US."

Mr Bird said the group's wholesale and direct portfolios had seen an increase in funds as overseas investors sought refuge in bricks and mortar against the backdrop of volatile markets.

He expected landlords would look to redevelop assets, such as upgrading offices and expanding shopping centres, rather than buying at inflated prices.

Chris Judd, AMP Capital's head of property funds management, said superannuation funds were showing a growing preference for investment in direct property.

"We have had a relationship with UniSuper for many years and other similar funds are also active," Mr Judd said.

"There is $15.9 billion in our Australian and New Zealand funds under management and we plan to increase that through selective acquisitions."

Mr Judd said bank and other lenders remained risk averse, which would keep a tight rein on raising cash in the coming year.

He said while property owners were looking for assets, it was unlikely to trigger an aggressive round of takeover activity.

On the retail side, Louise Joslin, AMP Capital's fund manager, said the group's Australian Core Property Portfolio would retain its weighting to retail, which was still outperforming office in returns.

"Shopping centres did not reduce in value as much as the office sector, and while it's tough ... sales are still high at many of our centres," Ms Joslin said.

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Frequently Asked Questions about this Article…

Will office assets outperform retail property in the medium term?

According to AMP Capital, office assets are expected to outperform retail property in the medium term. AMP Capital cites shifting investor sentiment and plans by landlords to upgrade or redevelop office buildings as reasons for that outlook.

Why are overseas investors still buying Australian property despite a strong currency?

AMP Capital says overseas investors have increased allocations to its wholesale and direct portfolios, seeking refuge in bricks-and-mortar assets amid volatile markets. This demand has continued even with a relatively strong Australian dollar, as investors look for perceived stability in physical property.

How are global economic risks influencing Australian property investment?

AMP Capital highlights that volatile economies in Europe and a slow upturn in the US are dominating the outlook. Director Andrew Bird noted mixed signals from share and bond markets and uncertainty around European debt problems, which has flowed through to the property investment market and kept investors cautious.

Are superannuation funds increasing their exposure to direct property?

Yes. Chris Judd, AMP Capital’s head of property funds management, said superannuation funds are showing a growing preference for investing in direct property. AMP Capital also reported long-standing relationships with funds such as UniSuper.

What strategy are landlords likely to use instead of buying assets at high prices?

AMP Capital expects landlords to focus on redeveloping existing assets—such as upgrading offices and expanding shopping centres—rather than making purchases at inflated prices. This redevelopment strategy aims to improve yields without chasing overpriced acquisitions.

Is the retail sector still performing well compared with offices?

At the time of the article, AMP Capital’s Australian Core Property Portfolio retained its weighting to retail because retail was still outperforming office in returns. Louise Joslin noted shopping centres did not fall in value as much as offices and many centres were still recording strong sales.

How are lenders and bank financing affecting property transactions?

AMP Capital reported that banks and other lenders remained risk averse, which would keep a tight rein on raising cash in the coming year. That cautious lending environment makes aggressive takeover activity or large-scale buying less likely.

How large are AMP Capital’s Australian and New Zealand property funds and do they plan to grow?

AMP Capital said it has $15.9 billion in its Australian and New Zealand funds under management and plans to increase that amount through selective acquisitions, focusing on targeted growth rather than broad market buying.