Predictions for interest rate cuts in the next two years will support an increase to local investment volumes. Here’s what experts think investors should keep an eye on in the year ahead. - CBRE
“Cautious optimism as opposed to the blind optimism we saw early last year.”
That’s the sentiment on the ground right now regarding Capital Markets investment volumes across Australia in 2024. It’s an observation which comes via Flint Davidson, CBRE’s Pacific Head of Capital Markets.
“We were hoping this time last year that market stability would return with investment demand. However, Australia had to re-price and this is taking some time,” he explains.
“This year the fundamentals are much more supportive of recovery, particularly as it relates to the normalisation of monetary policy. Pricing has reverted across all sectors in the past 12 months, some by as much as 30 to 40 percent. After a very disjointed past few years, it feels like there is intent to make things happen as we move through 2024.”
It’s a landscape similarly depicted by CBRE’s latest Pacific Market Outlook 2024 report which indicates relatively flat investment volumes this year before an expected resurgence in 2025. This forecast comes from CBRE’s prediction of two 25bps rate cuts from mid-2024, followed by two more 25bps cuts in the first half of next year. The expected result will be a 3 percent increase in Australian investment volumes in 2024 to circa $20 billion, followed by a 37 percent increase to $28 billion in 2025 aided by a rebound in office sales.
To delve deeper into these findings on Capital Markets investments, we also spoke to Tom Broderick, Head of Office & Capital Markets Research, Australia, to explain what it all means. Together, the pair will paint a clearer picture of what investors in this space should keep an eye on in the year ahead.
Industrial and retail: Australia’s expected growth sectors
CBRE research found that growth sectors such as industrial and retail were set to be early beneficiaries of Australia’s improving transaction volumes.
“Major institutional investors are typically more focused on gateway cities around the world,” says Broderick. “This means Sydney and Melbourne are likely to benefit more. However, markets like Brisbane and Perth are also benefiting from strong population growth, which is a driver for both industrial demand and retail spend.
“Industrial & Logistics is seen as the one of the safest sectors given the strong fundamentals such as e-commerce penetration as well as a lack of new supply across many markets. This sentiment will remain as long as rents are able to be maintained and the leasing market is stable.”
Office sector resurgence
With trough to peak expansion of cap rates forecast to be 150bps to 200bps for prime office, there’s a need to understand what’s strengthening the post-pandemic office sector and whether it’s sustainable long term.
“Given the decline in office values, some investors are starting to return to the asset class,” says Broderick. “The pricing is starting to look attractive again while cities like Brisbane, Perth and Sydney are starting to observe solid rental growth, implying the weakened post-COVID leasing market is recovering.”
When it comes to premium office assets, Davidson is similarly optimistic based on his market observations.
“Premium office is a finite commodity. It’s very hard to produce more product, particularly at present and in most years of the cycle owners generally aren’t sellers.
“The window to buy the best quality assets is open now as some REITS and wholesale funds remain motivated to achieve liquidity and developers are seeking funding solutions. While the discounts available are significant they won’t be to the same extent as secondary assets, but it will be the ability to access the best buildings that will motivate the capital.
“Those looking to get set later in the year or early next will probably miss the window.”
Student accommodation vs build-to-rent
This year’s Pacific report highlighted that student accommodation and build-to-rent assets would be less prone to outward cap rate movement than other real estate asset classes. What’s the perspective from the experts on why Living Sectors are proving more resilient to the higher interest rate environment?
“Both sectors in Australia are still lacking scale and are in their relative infancy compared to other parts of the globe,” says Davidson. “Student accommodation has very strong tailwinds due to the proven demand and operating expenses, undersupply across the major cities and higher returns which are attracting capital. International student numbers in Australia are back to pre-pandemic levels which is putting additional pressure on inner city residential vacancy rates. Student accommodation also has a more favourable MIT tax treatment which is a frustration of owners in build-to-rent.
The huge influx of international students, which is a key driver for Australia’s overall population growth, could also be a key driver adds Broderick. “However, we are seeing more significant rental growth in the Inner City apartment markets which has trended at 15 percent-plus in some instances during 2023. The structural undersupply of rental accommodation in Australia is well understood by global capital and we are receiving substantial levels of inbound enquiries on how to access the market from Asian investors in particular. When the tax settings are reset for build-to-rent, we anticipate a greater flow of investment into the sector, which is likely to focus initially on the Eastern Seaboard and will then diversify into the other state capitals.”
Potential investment volume challenges
While there is significant upside to CBRE's forecasts if interest rate market movements are favourable in the coming years, it’s equally important to be aware of any potential challenges to Capital Markets investment volumes.
“The bounce in investment volumes will be inextricably linked to the return of normalised monetary policy,” says Davidson.
“Any delay in interest rate cuts due to inflation proving stubborn is likely to keep volumes subdued, albeit above what we saw in 2023. The extended timeframe required to close transactions will mean transaction volumes will still lag for the first half of this year, however this shouldn’t be interpreted as a continuation of a subdued market.
“We expect the first movers to be busily setting themselves and taking advantage of a rare phase in the cycle for capital to take advantage of sellers' acceptance of re-set market pricing and a limited number of conviction buyers.”
Broderick believes that the risk is more weighted to the upside rather than the downside for investment volumes.
“Recent data releases on jobs, retail sales and inflation have been more pessimistic than consensus views, indicating that the RBA might have to start cutting rates to maintain a stable economy. This will help investor sentiment for commercial property.
“It generally takes a few years for investment volumes to return to previous peaks. This was the case following the Global Financial Crisis. Investors need to be confident that pricing has largely stabilised before we start to observe growth in volumes.”
Despite any potential headwinds, investors should find some confidence in Australia’s robust investment climate. CBRE’s Pacific Market Outlook reveals that Australia is currently ranked third across APAC for countries where buyers are targeting cross border investment. The reason?
“Australia is seen as a safe investment destination by offshore investors given its transparency, strong legal system and fundamentals such as population growth,” says Broderick.
This was originally published on the CBRE website. Read more here.