SYDNEY and Melbourne are emerging as two of the top three destinations for offshore investors to park their capital in the year ahead, according to a new report.

Colliers International's 2016 Global Investor Outlook found that, despite being relatively small property markets compared to London and New York, Sydney and Melbourne are the second and third targets respectively for offshore capital in 2016.

While London took out the top spot, Australia's largest cities beat the likes of New York and Singapore in the investment stakes.

John Marasco, Colliers' head of capital markets and investment services, says this is consistent with global capital flows data for 2015, which currently ranks Sydney third behind London and Manhattan in terms of investment volumes from offshore investors.

"Sydney is considered a global gateway city so for investors it ranks up there with New York, London, Singapore and the like in terms of being an attractive destination for investment," Marasco says.

"Melbourne is not far behind, and is seen as a good alternative to Sydney.

"Tenant demand is improving in both Sydney and Melbourne, with rental growth now occurring and vacancy rates reducing. This only adds to the appeal of these markets.

"Demand for Sydney assets will continue on the back of significant infrastructure investment in NSW, with metropolitan markets being a major focus for investors in 2016.

"In Melbourne, demand is still very much being driven by strong activity in the education sector.

"Sustained business and consumer confidence, a strong residential housing market, record low interest rates and low Australian dollar contribute to the overall strong interest in Australian property from offshore investors. 

"Australia's strong economy, transparent market and stable government make it a highly desirable investment destination for investment."

The survey found Australia is moving into its 25th year of positive economic growth, with the switch between a resources-led economy to services-led transitioning smoothly.

Real estate investment volumes continue to increase and in 2015 are set to be the highest level ever recorded.

Domestic investors continue to dominate direct real estate investment volumes, however a third of total investment currently comes from offshore. China is now the largest offshore investor in Australian commercial property.

"Right now, Australian investors prefer to invest locally and we see very little investment offshore," says Nerida Conisbee, Colliers' national director of research.

"This is very different from the previous cycle where Australia was the third strongest investor globally.

"This is beginning to change, with Australian superannuation firms starting to purchase properties offshore. It is, however, unlikely that we will see the same levels of offshore investment as we saw previously."

The survey found the majority of Australian investors in commercial property continue to buy property directly, as opposed to going in a joint venture with another company.

"The exception to this is if they are looking offshore," Conisbee says.

"In this case, a joint venture is generally established with a local group to take advantage of their expertise and potentially development pipeline in their own market.

"Similarly, although direct investment volumes into Australian real estate from offshore groups is high, many groups also prefer to joint venture with established Australian institutions. Almost all of them have received significant capital from large pension or sovereign wealth funds over the last five years."

Australian and New Zealand investors continue to view CBD office as their preferred investment class. The strong residential market is flowing through to demand for development sites, making this the second most popular investment class in the latest survey.

"The majority of investors in Australia and New Zealand continue to use debt to fund their expansion plans, although the level of debt is expected to remain low with most planning to use at least 50 per cent equity," Marasco says.

"The low cost of debt is expected to continue, with most investors predicting no change to the cost of debt over the next 12 months.

"Although overwhelmingly positive about the market, Australian and New Zealand investors remain risk averse. Very few are prepared to take on higher levels of risk to achieve higher returns. In that respect, they are among the most risk averse investors globally."

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