RICH PICKINGS: Bargains with a basement

Australia's richest investors might be battered and bruised after a very difficult year, but there are tentative signs they are slowly coming out of their shells again. And for the super rich, commercial property has become one of the prime hunting grounds for bargains.

A recent survey conducted by Retail Financial Intelligence for the Australian Private Banking Council examined where high-net-worth individuals (those with between $1 million and $20 million) plan to invest over the next 12 months.

There is a growing appetite for Australian equities, with just over half of all respondents saying they are likely or very likely to pump new funds into the local sharemarket in the next 12 months. But RFI research director Alan Shields points out that the relative safe havens of cash and fixed interest are also set to remain popular over the next year.

"They are also drawn to more stability – the last thing that they want to do is invest in a company that might not be around,” he says.

Perhaps that explains the renewed interest in commercial property. While the high-net-worth individuals covered by the RFI survey remain nervous about the idea of wading into the commercial property sector, the super rich are carefully scooping up bargains around the country.

Take the following deals, for example:

– In January, the Tieck family bought an office building at Martin Place in the Sydney CBD for $83 million, a discount of around 10 per cent, according to analysts.

– In March, the Laidlaw family (who sold the Hard Yakka brand to Pacific Brands in 2007) paid about $75 million for an office building in the regional Victorian town of Geelong.

– In April, Andrew Roberts emerged as the main bidder for the Australian Red Cross Blood Services' new headquarters in south Sydney. The deal, which is yet to complete, was estimated to be worth $70 million.

– Also in April, the Roth family was reported to be set to pay around $65 million for a half share in an office building at 1 Spring Street in Melbourne's central business district.

– In May, property investors Phil Wolanski grabbed an office building in Sydney for $40 million.

– Also in May, Andrew Roberts, paid $123 million for an office building in Canberra, a discount of about $17 million.

So what is driving these wealthy entrepreneurs back into the market? Vince Kernahan, national director of investment sales at Colliers International, says there is one key reason: price.

"A lot of these private investors have been investing in property for many, many years, so it's not a new commodity to them. Quite a few of them sold out at the top of the market in 2006 and 2007 are buying back in because the pricing has become so attractive.”

Kernahan gives the example of property investor Phil Wolanski, who was valued at $160 million in this year's BRW Rich 200. Back in November 2007, Wolanski sold an office building on a yield of 5.2 per cent; in May this year, he bought another office building for $30 million on a yield of 10 per cent.

While Kernahan says many property owners are trying to hold on to their assets through the downturn, those that have been forced to sell are finding the number of buyers are limited. Those wealthy entrepreneurs with cash and relatively low levels of gearing are perfectly placed.

"Because the onshore banks are limiting their commercial lending, it has limited the number of buyers to those that have equity. And some of the property owners have been prepared to meet the market, although many have been prepared to hold onto assets.”

But it's wealthy Australian investors who are buying up. Kernahan says interest from investors in Hong Kong and mainland China has increased sharply in the last three months and these investors have made a number of major purchases have been made recently, including a Sydney development site for $38 million and a car park for $41 million.

Property syndicates are also moving into the market. This includes syndicates put together by syndication companies such as GDI Property and small groups of four or five like-minded investors.

"Rather than buy a building for $50 million, they'd rather tip in $5 million or $10 million,” he says.

So what are these wealthy investors looking for? Kernahan says buyers are looking for properties with what he calls "good bones” – buildings that are well located, have good natural light, can be easily subdivided and have the right amount of car parking and retail space.

"They are looking for buildings that will still do well in a tough leasing market. The investors recognise that out market fundamentals are solid compared to the last downturn. Office vacancy rates are tipped to get to 12.5 per cent in the worst case scenario, compared with 25 per cent in the last downturn."

While buying an entire office building or industrial property is beyond the reach of many investors, the fact the super rich are sniffing out bargains in this area is proof that they consider commercial property a sound, long-term investment.

And there could be bargains around for a while yet. As canny investor Lloyd Williams noted recently: "It's not cheap enough for me – Australian property values could be [another] 20 per cent cheaper at the end of the year.”