_Australia the top destination in Asia-Pacific for cross-border capital in 2024

Knight Frank’s research estimates Australia will receive the highest cross-border investment volumes in the second half of 2024, with 36% targeting Australia, representing a 129% pick-up from the same period a year ago, and making it the top destination for cross-border capital for the whole of 2024. Japan and Singapore maintain their second and third positions with approximately 23% and 11% shares of cross-border capital targeting these countries respectively.

Before we examine what’s happening with cross-border investment in Australia in more detail, let’s first look at the trends globally and in APAC.

Asia-Pacific embracing a notable pick up in investment transactions in H2 2024

Cross-border investments have experienced a harsh retreat since interest rates started to hike aggressively in the second half of 2022. With yields compressing, cap rates expanding, and assets still being repriced, investors exercised caution and adopted a circumspect approach by focusing on opportunities within their national boundaries rather than pursuing ventures in foreign markets. Cross-border transactions in Asia-Pacific recorded US$6.2 billion in Q2 2024, an encouraging 17.4% increment compared to the quarter prior, according to data from MSCI Real Assets. Although it is still nearly one-third lower than the same period in 2023 (see Figure 1), the rate of decline is slowing down, which is an early sign that we are approaching the bottom.

Following soft global investment volumes last year, early signs of momentum are emerging.

We predict a six-to-nine-month window for global capital to capitalise on current pricing and reduced competition before the anticipated recovery becomes widely recognised. Our Active Capital research forecasts investors from Singapore and Japan to be among the top five global sources of real estate capital for the year. Most investor interest is expected to target sectors with structural tailwinds, such as living sectors, logistics and private credit, and where occupier markets show strength. Australia and Japan are projected to be among the top ten destinations for global investment, reflecting the ongoing appeal of these markets in the current economic climate.

Australia looks poised for a swift rebound, with cross-border capital returning

Deal flow in Australia remains generally constrained due to postponed rate cuts and a persistent price disparity.  The withdrawal of overseas investors has been most apparent in Australia compared to other key markets in the region. Throughout 2023, cross-border volume more than halved (56.8%) that of 2022, suggesting much resistance to deploying capital into the fastest repriced market in Asia-Pacific.  However, since Q2 2024, cross-border capital has returned, with deal momentum gaining traction, supported by several high-profile transactions.

Q2 2024 clocked US$1.9 billion worth of international capital in Australi, 2.5 times the volume of Q1 2024 but still 8.5% lower than Q2 2023. In June, Mitsui Fudosan acquired a 66% stake in 55 Pitt Street in Sydney for US$879.4 million, continuing a trend that has made Australian commercial property assets the top target for Japanese investors. Japanese firms, well-capitalised after earning record profits due to the weak yen and low borrowing costs, remain eager to find higher-yielding assets overseas. This trend hit a record US$1.9 billion in 2023.

Although progress is being made on narrowing the price gap, deal completions face challenges including uncertainty over rate cuts, slow adaptation to current pricing, and a lack of deal evidence. However, relatively speaking, the assets in Australia appear more attractive due to higher-than-average re-pricing compared to the rest of the region.

Despite muted sentiment in the first half, the second half will likely witness a narrowing bid-ask spread, which would encourage dealmaking. A higher number of assets in the pipeline have been actively marketed, exceeding expectations. For instance, Woolworths Distribution Facility (Mulgrave), 40 Miller Street, 383 La Trobe Street and 367 Collins Street are expected to close in the coming quarters.

The following six to nine months offer a prime investment window for undervalued assets; cautious buyers should note that owners' price recovery optimism may limit future acquisition opportunities as the latter holds onto their assets in anticipation of a turnaround.

Asset class trends in Australia

The most favoured sectors for cross-border capital in Australia are office, industrial, living and retail.

The industrial sector continues to be Australia’s most favoured stabilised asset class due to its relatively low risk with long term growth potential. Yields appear to have stabilised, averaging 5.5% to 6.4%, suggesting that pricing adjustment is probably completed. Institutional investors are likely to return to the market to capitalise on this stability. Based on Knight Frank’s estimates, we expect the annual industrial transaction volume to be on par with office volume. The Office sector is anticipated to see stabilisation in yield in H2 2024 after substantial repricing and two years of yield softening. As transactional evidence accumulates and heightened investor confidence spurs increased market participation, liquidity in the office market is gradually improving, with more office transaction volumes expected over the coming months. The Living sector retains substantial interest, but attention shifts towards co-living and purpose-built student accommodations (PBSA) due to rising construction costs, and a lack of clarity of proposed tax reform, rendering build-to-rent (BTR) less appealing. The retail sector attracts renewed institutional interest due to adjusted pricing, positive spreads, and limited core supply.

Sydney’s well-established CBD office precincts have yielded several core opportunities with its high-quality prime assets. This has made the city's offices the top targeted asset type by cross-border capital year-to-date in 2024. Australian offices, which have been the quickest to adjust prices in the region, have appealed to investors looking for yield-accretive acquisitions. Australia's transparent property markets and robust economic fundamentals will remain a draw for international capital.

You can read more about expected cross-border movements in APAC’s Capital Markets sector in Knight Frank’s Horizon Report Series Part III: Look Beyond the Norm. If you want to discuss the market with me, you can contact me at neil.brookes@asia.knightfrank.com or +65 8309 4985.