Overseas buyers target offices

That's the view of a range of industry bodies, from leading accountancy firm Ernst & Young and Australian Property Institute Victoria, to Jones Lang LaSalle.

Ernst & Young Real Estate partner and API Victoria commercial property spokesman Richard Bowman said the Melbourne office market would be dominated by cashed-up Asian and risk-averse European institutional investors this year. Investors worldwide were looking for secure investments with stable, assured returns, he said.

JLL's head of research and consulting in Australasia, David Rees, said the global financial crisis had stimulated a big shift between countries, sectors and investment vehicles. Australia had benefited from this shift.

"The relative volume of funds seeking exposure to the Australian market from offshore . . . has increased substantially over the past three years," Dr Rees said.

JLL's Victorian managing director, Andrew Wood, said Australia's relatively high-yielding commercial real estate made the country attractive for offshore investors with a lower cost of capital. "We expect this trend to continue for the foreseeable future," he said.

Last year, almost $1 billion worth of Melbourne offices were sold to overseas investors, according to the API.

"With foreign buyers underpinning the strength in the Australian office market and continued uncertain economic times in Europe, offshore investors see Australia as a safe haven with a stable growth outlook on the back of the strengthening resources boom," Mr Bowman said.

This perception was strengthened by favourable tax structures. "The Australian market is viewed as having a transparent legal and regulatory system with strong and enforceable leasing covenants," he said.

E&Y and API Victoria found that the Melbourne office sector showed a total return of 10.5 per cent at the end of last year. "Victoria and New South Wales have equally benefited, with purchasers coming from Germany, Singapore, South Korea, Malaysia and China," Mr Bowman said.

E&Y and API Victoria found the total vacancy rate for the Australian office sector stands at 7.4 per cent, with net absorption of about 240,000 square metres over the past 12 months 20 per cent higher than the historical norm. "Foreign investors are buoyed by this low vacancy rate and see it as a precursor to solid rental growth," he said.

The CBD office market looked even better, with a historical vacancy rate of 5.3 per cent compared to a long-term average of just over 10 per cent.

"When vacancy rates get below 8 per cent, that's when we see net effective rental growth," Mr Bowman said. Although the economy was slowing and there had been some lay-offs, "this is nothing like the early 1990s when we had a double whammy over recession and an oversupply in office space".

"This time, developers and banks are better disciplined and when economic conditions improve, the office sector is set for double-digit growth."

Mr Bowman said Australian superannuation funds would also become increasingly active as they looked away from riskier overseas investments.