Commercial and residential outlook: What lies ahead for Australia’s real estate industry?

As Australia’s commercial and residential property sectors cautiously emerge from almost two years of lockdowns and disruptions, 2022 is shaping up to be a big year for real estate, as investors unleash pent-up demand and back the reopening of economies and international borders. Banner Asset Management’s Quarterly Report offers a look into the current performance of Australia’s commercial and residential real estate industries, as well as the key trends impacting these sectors in 2022.

Firstly, it looks as though a decades-long era of falling interest rates may soon end in 2022, as inflation rises and central banks move to tighten monetary policy. Inflation and rates have a large impact on asset prices and returns, evidenced by the correction in US and Australian stocks after Federal Reserve chairman Jerome Powell signalled rates could rise this month.

Despite the battering that our national economy has taken in the past two years, expectations for a stronger economy this year have been fuelled by robust readings for inflation and unemployment, which has highlighted the economy’s ability to bounce back from lockdowns. Prospects for an economic rebound to help with budget repair are looking good, with the RBA forecasting GDP growth at a rate of 4.25 per cent in 2022¹.

Residential and industrial and logistics properties have continued to see exponential growth in the last quarter, driven by the need to work from home and uptick in online shopping throughout various lockdowns. In comparison, commercial office and retail have been hardest hit by recurring COVID-19 disruptions, which have subdued rents, leasing, and vacancies.

Following the reopening of international borders, investors are itching to get back into the market. A survey by Colliers found investors are looking forward to the return of business activity and travel as an opportunity to make decisions for the medium term, resulting in increased cross-border investment and flow of funds for Australian industrial and logistics developments². Investors are also looking to stimulate the student accommodation market and consequently retail and hotel properties, all having been hit hard by border closures. JLL noted that Australia’s strong economy, transparent real estate markets, and low return volatility were most alluring for international investors.

Housing affordability has continued to be a hot button issue in the past quarter, with buyers facing a sharp rise in prices and requirements by regulators for banks to increase the interest rate buffer on new home lending. Those priced out of capital city housing markets are expected to look towards regional areas and capital city apartments, which have not seen as strong of an increase as houses. With price and interest rate rises attracting more sellers, more properties are expected to be listed, and buyers may be reluctant to overcommit. As such, capital city house price growth is expected to slow from the record pace seen in 2021, meaning that vendors may need to readjust their expectations. Knight Frank predicts an eight per cent house price growth in 2022, down from 22.1 per cent last year³, as the market subsides.

Looking to the industrial and logistics sector, demand for facilities has skyrocketed in response to COVID-19-shaped consumer desires. The retail sector and related transport, postal, and warehousing services directly responded to the uptick of online shopping, driving vacancies to record lows across the country. CBRE noted that pressure on rents remains with a lack of new stock, rising land and construction costs, and a shortage of certain building materials⁴.

The growing shift towards online shopping has clearly been fast-tracked by the pandemic, with a recent survey from UBS revealing visits to shopping centres in Australia fell by 3 per cent in 2021 compared to pre-pandemic levels, and visits to supermarkets went down 4 per cent. Department store visits saw a 4 per cent increase, and online shopping saw a major increase of 10 per cent⁵.

The coming year will also be significant for the office sector as Australians shift to living with COVID-19 and returning to the office. During the first two years of the pandemic, rents have trended downwards and vacancies have surged, particularly in CBDs, due to various lockdowns and work from home orders. However, as work from home recommendations lift across many states and workers begin to fill our CBDs once more, it is almost guaranteed office vacancies will plummet.

Post-COVID, expectations from workers have changed, with employers facing increasing pressure to address environmental, social, and governance issues, fuelled by sustainable builds from major corporations. JLL revealed net-zero commercial real estate properties will soon be the industry benchmark, and property managers are gearing up to “future-proof’ their assets⁶. Beyond environmental concerns, buildings that address social issues such as the diversity of the workforce are also becoming more prominent, with emerging features of new office buildings including prayer rooms and gender-neutral end-of-trip facilities.

As Australia moves away from lockdowns and work from home orders, 2022 is shaping up to be a banner year for both commercial and residential property. Having observed continued growth within the residential and industrial and logistics sectors, and gradual recovery of office and retail sectors this quarter, we can expect these industries to continue this positive trajectory, spurred on by bridled interest from investors.

By Andrew Turner, CEO of Banner Asset Management

1. _{^{Statement by Philip Lowe, Governor: Monetary Policy Decision | Media Releases | RBA}}
2. _{^{Colliers_GCM 2022 Investor Outlook Report Final 06122021.pdf}}
3. _{^{KF_australian-residential-review-q4-2021-8674.pdf}}
4. _{^{Australia Industrial _ Logistics Vacancy 2H21.pdf}}
5. _{^{UBS Evidence Lab, 25/1/2022 uet57817.pdf}}
6. _{^{‘Australia and New Zealand real estate investment themes for 2022’ (jll.com.au)}}