A new research paper by Jones Lang LaSalle argues there is a strong case for a higher allocation to Queensland commercial property for investors looking to maximise their long-term returns

While many investors are focused on the immediate opportunities elsewhere, Jones Lang LaSalle believes that local and international investors looking to maximise their long-term returns should not ignore current opportunities to increase their investment allocation to Queensland and capitalise on the state’s strong growth prospects.

A new White Paper entitled, “Queensland Investment Case: Why Queensland? Why Now?” argues that the Queensland economy is on the verge of strong and sustained recovery, which will be led by major engineering construction projects, including gas projects, coal projects and infrastructure projects.

These projects support widespread forecasts that Queensland will deliver significantly higher economic, population and employment growth than other states over the next few decades, as it has in previous decades.

Jones Lang LaSalle’s Queensland Managing Director, Geoff McIntyre said this growth is expected to support the office, retail and industrial property sectors significantly.

“Local institutional investors and offshore investors have historically assigned Queensland a relatively low weighting – around 15% - within their commercial property portfolios. We believe that there is a strong long-term case for investors to increase this allocation to Queensland, and Brisbane in particular,” he said.

“While there are valid reasons to explain a lower weighting to Queensland historically, we think if you look at the growth prospects of the state objectively, an allocation of more like 22% to Queensland seems more appropriate for investors to maximise their portfolio returns over the long term.”

“The potential long-term payoff for investors is a narrowing of the risk premium applied to Queensland commercial property assets, as the state’s economy and population converges towards that of New South Wales and Victoria,” he said.

“Obviously, stronger economic and population growth will also require higher levels of development, which not only benefits developers, but will create a greater number of quality assets for investors that will meet their investment mandates in terms of age and sustainability.”

According to Queensland Research Director, Leigh Warner, Brisbane commercial property markets have stabilised over the last six months and this stabilisation should increasingly give investors the confidence to resume looking at Brisbane.

“There is no question that the focus of local investors is on other Australian office markets at present that have stronger immediate term prospects. But we think there are good counter-cyclical buying opportunities in Brisbane for investors to position themselves for both a medium-term cyclical upswing and the state’s undeniably strong long-term demand prospects.”

“These current opportunities in part reflect misconceptions about the outlook for Brisbane. A relatively stable outlook for the next 18 months is now much more certain, but many investors and owners still have a much softer outlook for Brisbane in their minds that many particularly negative forecasters were putting out in 2009.”

“The availability of well-leased quality new office stock from the recent strong construction cycle also adds to this opportunity for investors,” Mr Warner said.

He added the Brisbane retail and industrial markets have both seen significant curtailing of new supply over the past 18 months and are well positioned to recover relatively quickly as occupier demand returns.

Bottom line – Queensland’s share of the pie is growing…

Mr McIntyre said, “Queensland’s economy and population will grow at a faster pace than that of New South Wales and Victoria over the next few decades and this will mean that Brisbane’s office stock should also grow at a faster pace than Sydney and Melbourne.”

“This should be seen as a very strong marker for the international investment community to look at the state in terms of their total investment in Australia, and increasing their exposure in Queensland.”

Mr McIntyre said similarly, it was logical that the yield differential between Brisbane and the larger markets should shrink over time.

“Brisbane’s office stock has grown relatively quickly over the past decade in line with strong economic growth. Since 1999, the Brisbane CBD office stock has grown 29%, while the Brisbane Fringe has grown by well over 50%. In contrast, the Sydney CBD office stock grew 10% and the Melbourne CBD grew 26%. Looking at the long-term trend, the Brisbane CBD was just 21% of the size of the Sydney CBD at the beginning of our data series in 1970, but it has now reached 43% in early 2010.

“The bottom line is that Queensland’s share of the pie – across key variables such as output, population, industrial production and employment –  is growing and is likely to result in the eyes of the investment world coming to rest on Queensland as a key target for funds,” Mr McIntyre said.

Source ABS, Access economics (June 2010), Jones Lang LaSalle