Property investment activity to resurge by close to 40% in Australia in 2025 amid forecast interest rate cuts12 February 2024
Falling bond yields and anticipated interest rate cuts are expected to underpin a small pick-up in commercial property transaction activity in Australia this year ahead of a close to 40% resurgence in 2025.
This is one of the key forecasts in CBRE’s 2024 Pacific Market Outlook report which also explores some of the key over-arching themes that will guide market activity and decision making this year.
CBRE’s Pacific Head of Research Sameer Chopra noted, “Falling bond yields should reduce some of the price anxiety around transactions, which should increase by 3% this year to circa $20 billion, followed by a 37% increase to $28 billion in 2025 as office sales being to rebound.”
“This is still just half of 2017-2019 levels, which we would view as “normalised years”, so there is significant upside to our forecasts if interest rate market movements are more favourable.”
Growth sectors, including industrial and residential, are likely to be early beneficiaries of these improving transaction volumes in Australia, benefitting from a capital value tailwind as interest rates begin to fall.
CBRE’s expectation is for two 25bps cuts from mid-2024, followed by two 25bps cuts in the first half of next year.
With gearing in the commercial property industry below 30%, CBRE’s Market Outlook report also tips that forced selling is unlikely with vendors more likely to be motivated by needing funds for robust development pipelines and fine-tuning portfolio allocations.
The report also predicts a “triple boost” for Australia’s living sector, with demand for housing expected to benefit from rising population, rising employment and rising incomes.
“Collectively this wealth effect will add circa $860 billion of income over the next decade, a significant proportion of which is likely to be directed towards housing and living,” Mr. Chopra said, noting that Australia was expected to have one of the highest growth rates globally at 15%, second only to Canada, over the next decade.
This growth is expected to drive significant demand for real estate across the board, translating to incremental demand for 475,000 homes, 5.2 million square metres of industrial space, 2 million square metres of office space, 1.1 million square metres of retail space and 13,500 hotel rooms between 2023 and 2025.
Other forecasts include:
• Australia cap rates are tipped to expand by another 25bps to 50bps in Q1, 2024 and by up to 100bps over the course of the year, but there will be a flatlining later this year and values are likely to be more resilient supported by higher rent growth assumptions.
• Trough to peak expansion of cap rates is forecast to be circa 200bps for prime industrial, 150-200bps for prime office, circa 75-100bps for retail and circa 30-50bps for the living sectors, with student accommodation likely to be more resilient than built-to-rent.
• On the leasing front, premium office and retail assets will be one area to watch with a further tightening in vacancy rates forecast for this market segment.
• The return to office will gather pace after reaching 71% of 2019 levels in 2023, well above the 54% recorded in the prior period. Even higher visitation was recorded on peak days and in 2024 CBRE expects peak day visitation will get close to pre-pandemic levels, while also retaining flexibility.
• Micro-precincts in inner city locations will be a key area of opportunity, as these locations benefit from workers returning to the office, an increasing number of international students and consumers craving ‘buzz’.
• There will also be significant opportunities to coinvest in emerging precincts defined by infrastructure investment in metro-style rail, healthcare and technology hubs.