Why private investors are busy real estate buyers

While interest rate fluctuations and inflation shape the investment decisions of institutional real estate players, private investors, busily scouting countercyclical buying opportunities, are wasting no time muscling in.

The appetite from high-net-worth individuals for real estate that presents long-term growth, is helping to underpin sectors impacted by economic uncertainty and structural shifts, such as offices and shopping centres.

For example, private investors and syndicates accounted for 84% of neighbourhood shopping centre and large mall purchases across Australia in 2023, a leap from their typical 30% share.

They’ve been switching up from investing in service stations – popular through the period of low interest rates up to 2023 – and playing in a space where institutional investors have traditionally driven most of the investment.

Private fund management company IP Generation’s $35m purchase of Richmond Mall, a Sydney metropolitan neighbourhood shopping centre, at a fully leased yield of 5.73%, is one standout deal. The sales campaign highlighted over $300m in unsatisfied capital from domestic and offshore private wealth entities.

“Private capital is seeking opportunities at the same time that institutional investors weigh up their traditional options as part of their capital management strategies and development funding” says Luke Billiau, head of capital markets, JLL. “Generally speaking, we expect to continue to see institutional investors to be net sellers of traditional commercial sectors as private capital dominates.”

In offices, private investor enthusiasm has been writ large with the sale of five-storey CBD office building, 104 Frome Street, Adelaide, in April. The sales campaign led by JLL attracted more than 100 enquiries, with the eventual buyer a local private syndicate, paying $14.2 million at an initial yield of 6.88%. It was South Australia’s largest office transaction for more than 12 months.

Fulfilling residential demand

Since 2022, Australia-based private investors have accounted for over 20% of commercial real estate purchases nationally, up from the usual 15%, reflecting renewed appetite for opportunities. A record $6 billion of private capital was deployed in 2022, followed by $5.1b of acquisitions in 2023.

Australia’s housing supply woes, including an acute under-supply of apartments, are creating pockets of opportunity, especially in the nascent build-to-rent sector, according to the JLL paper, What’s Driving the Melbourne Real Estate Investment Market?

Institutional investors have traditionally been the driving force behind build-to-rent housing but are slowing down development as they focus on markets where there have been more pricing dislocation. This is “creating an attractive opening for private investors to fill the residential supply gap”, says Andrew Quillfeldt, head of capital markets research, JLL. He highlights Melbourne’s 1.1% rental housing vacancy rate and 33% increase in rents over the past three years.

Melbourne’s relative land value advantages over Sydney, faster planning approval times, and robust demand are strong factors against the challenges of high construction and project finance costs.

“The growing share of real estate investment from private operators is helping maintain momentum in real estate markets affected by economic instability, debt restrictions and asset repricing,” says Billiau. “Their nimbleness, relatively small reliance on debt, and appetite to buy are creating interesting opportunities that are helping shape markets alongside the bigger players.”