The great offshore property rush

Cash-rich China-based investors have been pumping money into Australian real estate … and their interest shows no sign of waning.

At the same time, our own ultra-rich investors are cashing out of property after buying in cheap when the market was in the doldrums a few years ago.

It generally pays to keep an eye on where the ultra-rich are investing. This is a group that has an army of expertise at their disposal, so they’re usually among the first to spot the next big thing.

Right now, Australian wealthy investors are heading overseas in droves, not just for the equity opportunities but also to snap up real estate at bargain basement prices.

Chris Selby, head of wealth management at Deutsche Bank, says many of his Australian clients are selling out of local property because “the prices are just too attractive to resist”. These clients are now focused on real estate opportunities offshore.

“We’ve seen some [clients] moving into US real estate. High-net-worth investors are also actually quite prepared to consider Europe, unlike perhaps some of the institutions. Some are buying luxurious residential [property] in the US and Europe. They’re not buying Asia so much,” Selby says.

Interest in overseas property may be on the rise, but Australian investment in offshore real estate is still well below the level it was at pre-GFC. As you can see from the below chart, in the fourth quarter of 2007 Australian investors, underpinned by ambitious property trusts, invested $7 billion in offshore real estate. In Q3 2013, less than $1 billion was invested in offshore property.

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Meanwhile, overseas investors are increasing their exposure to Australian commercial property.

“Those that are buying are not Australian domiciled. They’re Asian, some US, some European. But principally out of Asia they are definitely acquiring commercial real estate here,” Selby says.

Colliers International national director of research, Nerida Conisbee, says she’s also seen a big increase in interest from Chinese investors in the local market.

“It has picked up a lot, primarily in the residential development space. What we’re seeing is a lot of acquisitions by Chinese groups, particularly of CBD residential sites. In terms of commercial, we’re seeing growth in office purchases,” Conisbee says.

As you can see from the chart below, Chinese investment in commercial property has grown significantly, from around $17 million in 2007 to just under $500 million year-to-date.

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This upward trend is set to continue as cashed up China-based investors look for the next big opportunity.

“They’re very active in residential and they’re starting to move into office. We think that over the next 3-4 years we’re going to see them move into industrial and retail,” Conisbee says.

A big driver of this increased appetite for Australian property is regulatory change. Insurance funds in China are now allowed to invest more offshore, meaning more capital is flowing into Australia from those groups.

In a double whammy, Chinese developers buying up these local sites are then selling them on to Chinese investors back at home. Because they know their target market so well, they’re able to develop the right sort of stock.

At a market update last week, real estate portfolio analysis group IPD presented their findings on overseas activity in the domestic commercial property market.

As per the below chart, in the past two quarters much of the transactional activity in Australia has come from ‘other’ investors, or overseas players. Indeed, overseas investors have been active in the local market for some time, posting positive net transactions since 2011.

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“There has been a lot of activity by overseas players. Offshore is a very dominant and pronounced player within our market,” says IPD managing director Anthony de Francesco.

While overseas investors – including high-net-worths – have been ramping up their property holdings in the local market, the chart above shows that unlisted wholesale funds have been net sellers this year.

It’s not just institutional investors buying up this commercial property. Selby says that many Deutsche Bank non-Australian ultra-high net worth clients are investing in local property.

“There are definitely ultra-high net worth investors – through their entities – buying real estate here”.

Conisbee echoes this sentiment, saying China-based high-net-worths are the main buyers, alongside some government-backed groups.

Part of the problem is it’s notoriously difficult to find out exactly how much property overseas investors are buying here.

“It’ll be interesting in a few years’ time when we see the capital shifts that have come into this country and what they own. It’ll be less securities from the individual’s perspective; the institutions will do that, but the ultra, ultra-high-net-worths will have bought an awful lot of real estate here,” Selby says.