Investors urged to position for 'best commercial property year in recent memory'
After a steady 2023, at least two of three commercial property sectors are poised for what could prove to be spectacular gains in 2024 and beyond.
The Australian commercial property market continues to be a topic ripe for speculation and worthy of anticipation.
Contrary to the pessimistic predictions made in 2022, the market has shown surprising resilience and growth. As we delve into the data and insights, it becomes evident that 2024 holds promise for astute investors who carefully navigate the evolving landscape.
The commercial market experienced a mixed year, with one sector delivering especially high returns in 2023.
Retail
Statistically speaking, retail stands out as the most stable asset class in 2023, demonstrating minimal yield volatility attributed to both low stock levels and sustained buyer engagement. This resilience can be attributed to two key factors.
Firstly, the limited stock volume in 2023 has resulted in investors surpassing available supply in the market. Secondly, financially well-positioned investors remain prevalent, holding the belief that making quality acquisitions now will generate superior returns when rates eventually decrease.
Office
The Australian commercial office property market in 2023 faces substantial challenges, marked by increased vacancy rates and a downturn in demand.
Prime commercial yields (2023 vs 2022)
| 2022 yields | 2023 yields | Growth | |
|---|---|---|---|
| Industrial | 4.6% | 5.4% | 17% |
| Office | 5.2% | 5.9% | 13% |
| Retail | 5.6% | 5.9% | 5% |
Despite many companies trying to entice workers back to the office, remote work trends continue to impact leasing, with companies downsizing physical office requirements.
Urban centres experience a notable oversupply, contributing to a competitive and tenant-favourable market. The decline in rental prices and property values underscores the overall pessimistic outlook, as the commercial office sector grapples with a challenging landscape defined by reduced demand and heightened vacancies.
Industrial
The majority of high-quality assets, characterised by strong tenants, growth potential and decent building structures, are currently being offered at prices around 6 per cent higher than a year ago.
The reason for this pricing trend is that these assets are predominantly owned by fund managers who are inclined to retain them due to robust rental growth.
As of November 2023, prime industrial assets across Australia have experienced a remarkable 17 per cent growth in rent over the past 12 months.
Commercial property in 2024
It remains apparent that Australians’ enduring love for property plays a crucial role in shaping the market.
Migration levels, guided by economic considerations, continue to bolster the residential real estate sector, but also have a similar impact on the commercial sector.
As an everyday investor, the takeaway is clear: the market might defy predictions, and opportunities may emerge in unexpected places.
Commercial property, particularly office spaces, faced uncertainties in 2023, however, the industrial and retail sectors look strong when it comes to property price appreciation potential.
The market remained robust, and the retail market proved more stable than anticipated.
Projections for 2024 align with this trend, foreseeing continued strength in the industrial sector and stable performance in retail.
Investors who anticipated these dynamics in 2023 were well-positioned, and a similar strategy could pay off in the coming year.
Mortgage costs and investment opportunities
While making a case for a positive overall outlook for 2024, it’s essential to acknowledge the likelihood of consistently higher mortgage costs throughout the year.
Smart investors, however, can act strategically.
The increase in property buyers and tight stock levels may present challenges, but they also create opportunities for those willing to invest wisely.
Potential buying opportunities
Despite higher interest rates and tighter stock levels, 2024 is poised to offer buying opportunities, especially for those eyeing well-priced properties. Some larger assets, like certain shopping centres, are selling at attractive yields, making them appealing to investors seeking stable returns.
Looking towards 2025
As 2024 progresses, the anticipation is that the real estate market will witness a surge in activity, especially if interest rates drop towards the end of the year or in 2025.
The potential for a significant increase in property transactions and positive growth is high.
Strategic advice for investors
For investors in 2024, strategic expansion of their asset base is recommended
The market, currently in a quiet phase, is expected to expand as money on the sidelines is redeployed.
Higher rent growth and more affordable lending, anticipated in 2025, make 2024 an opportune time to position oneself for future gains.
As we navigate the uncertainties of 2024, the Australian commercial property market appears resilient, driven by factors such as Australians’ enduring passion for property, government support and migration.
Smart investors who read the market dynamics, act strategically and capitalise on emerging opportunities stand to benefit from what could be one of the best investment years in recent memory.
