Australia is predicted to be the number one destination for cross-border capital in the Asia Pacific commercial property market in 2024, according to the latest research from Knight Frank.
Knight Frank’s Horizon Report III – Look Beyond the Norm found Australia was expected to attract 36% of total cross-border flows in 2024.
Japan and Singapore maintain their second and third positions, with approximately 23% and 11% shares of cross-border capital targeting these countries, respectively.
Total cross-border investment into Australian commercial property is forecast to be US$10.2 billion (approximately $AU15.5 billion) over 2024, up from US$5.9 billion (roughly $AU9.01 billion in 2023).
The Horizon Report III found there would be a significant rebound in cross-border real estate investments in Asia Pacific overall in the second half of 2024, with volumes expected to rise by more than 33% compared to the same period in 2023.
The anticipated increase is largely driven by potential Federal Reserve rate cuts, which bode well for commercial real estate investments.
This rise will primarily be driven by the office sector, which is expected to attract 30% of the cross-border investment volumes.
Knight Frank Global Head of Capital Markets Neil Brookes said, "Australia stands out as a prime destination for cross-border investments due to higher-than-average re-pricing compared to the rest of the region. While the adjustment may still have further to go, the gap between valuations and buyer sentiment has narrowed, and the outlook for relative returns across asset classes is shifting back in favour of offices. The substantially higher capitalisation rates in Australian offices mitigate near-term risks and pave the way for strong risk-adjusted returns, which attract international investors.”
In Q2 2024, Australia received US$1.9 billion worth of international capital, a 2.5-fold increase compared with Q1 2024, signalling renewed confidence among foreign investors.
The office sector was the main driver of this rise, accounting for 63% of total transactions, highlighting the enduring appeal of Australian commercial real estate to international investors, especially those from Japan.
Mitsui Fudosan’s acquisition of a 66% stake in 55 Pitt Street for US$879.4 million was a stand-out transaction. This significant transaction not only highlights the continued interest of Japanese investors in Australian commercial assets but also reinforces Australia's position as a top destination for cross-border real estate capital in Asia-Pacific.
Mr Brookes added, “The second half of 2024 is expected to witness a narrowing bid-ask spread, which should encourage more deal-making activity as cross-border investors reappraise this new outlook. Japanese investors have shown a strong appetite for Australian commercial property assets, exemplified by Mitsui Fudosan’s recent acquisition. This pattern is expected to persist as Japanese firms continue their hunt for higher-yielding assets in overseas markets.”
Knight Frank’s Chief Economist in Australia, Ben Burston, said deal flow in Australia had been generally constrained since 2022, but Q2 this year saw a strong improvement in sentiment, and with it came a flurry of transactions.
“The office and industrial sectors are the most favoured for cross-border capital in Australia, followed by the Living and Retail sectors,” he said.
“Sydney’s well-established CBD office precincts have yielded several core opportunities, and the market remains the preferred destination for many cross-border investors, so it was no surprise that Sydney was first to show a material improvement in sentiment and liquidity.
“Related to this, well-located prime offices in Sydney have shown signs of yields stabilising after substantial repricing over the past two years.
“As transactional evidence accumulates and heightened investor confidence spurs increased market participation, liquidity in the office market will gradually improve and broaden to other markets in coming months.
“Meanwhile, the industrial sector continues to be Australia’s most favoured stabilised asset class due to its relatively low risk with long-term growth potential.
“Prime industrial yields have stabilised more quickly than other sectors suggesting that pricing adjustment has probably run its course and cross-border investors are likely to return to the market relatively quickly as they seek to boost their portfolio allocation to industrial.“
