Morgan Stanley’s Investa Plans A$500 Million of Office Purchases

Morgan Stanley-owned Investa Property Group said it plans to spend as much as $500 million ($523 million) on office buildings over the next year amid growing foreign interest in Australian property.

Investa, Australia’s biggest owner and manager of office properties, expects the value of office buildings to rise in Australia as Asian and European investment increases and domestic pension funds follow, Chief Executive Officer Scott MacDonald said.

“We’re being inundated with inquiries, mostly from offshore,” MacDonald said in an interview yesterday. “Over the next 12 months, we’ll buy about A$250 million to A$500 million of properties.”

Investa’s unlisted Investa Commercial Property Fund in March received A$87 million from Swedish state pension fund Forsta AP-Fonden and A$50 million from AvSuper, an Australian aviation industry pension fund, in February, Campbell Hanan, head of Investa Office, said during the interview.

“We’re constantly talking to people about opportunities to buy buildings that are not listed on the market” to deploy the capital the funds raise, MacDonald said.

About A$3.5 billion of commercial properties changed hands in Australia in the first quarter of 2013, a 15 percent increase from a year earlier, property broker CBRE Group Inc., which examined transactions valued at more than A$5 million each, said in an e-mailed release this week.

REITs Buying

Offshore investors usually lead a rise in buying, MacDonald said. They are followed by domestic real estate investment trusts, then local pension funds and “mom and dad” investors, whose entry shows the market has peaked, he said.

For REITs, “a year ago, the best use of capital was probably to sell an asset and buy back stock,” Hanan said. “Now the best use of capital is to buy real estate.”

The S&P/ASX 200 REIT Index has surged 25 percent in the past 12 months, compared with a 13 percent gain in the benchmark S&P/ASX 200 Index.

Purchases by domestic buyers were 33 percent higher in the first quarter of 2013 compared with a year earlier, CBRE said in its release.

REITs can comfortably raise their average gearing -- the proportion of debt to equity capital -- to about 32 percent from the current 26 percent, giving them funding capacity of about A$6 billion, CBRE’s national director for capital markets Josh Cullen, said in the release.

Acquisition Plans

Australian capitalization rates, a measure of investment yield that declines as prices rise, haven’t fallen to the same extent as other developed markets since 2008 due to relatively high interest rates and uncertainty about the Australian dollar exchange rate, MacDonald said.

The cost of debt has fallen after the central bank cut the cash rate by 1.75 percentage points since November 2011, so there should be “significant valuation increases going forward,” he said.

Sydney-based Investa manages more than $7 billion of office buildings, more than half of it through two funds.

Investa Office Fund, the company’s listed property trust, manages about A$2.5 billion and is “aggressive” in its pursuit of acquisitions, MacDonald said.

Unlisted Investa Commercial Property Fund, which manages about A$1.8 billion on behalf of institutional investors, is “opportunistic” and seeks investments as it raises capital, he said.

Investa also has about A$3 billion of properties on its own balance sheet and isn’t planning any new purchases or sales, MacDonald said.

The two funds last month jointly agreed to buy an office development by Leighton Properties, a unit of Australia’s largest builder, Leighton Holdings Ltd., in Melbourne’s city center for about A$462 million. The project is expected to be completed in mid-2015.

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