Why commercial property could be poised for a ‘turning point’ in 2024

“We have been seeing rising inflation and interest rates, which has been impacting capital values globally for commercial property,” he said.

According to data from the Australian Bureau of Statistics (ABS), the CPI rose 5.6 per cent in the 12 months to May, down from the 6.8 per cent figure recorded in April.

Following this decline in the inflation growth, among other positive data points, the Reserve Bank of Australia (RBA) held the cash rate at 4.10 per cent in July, marking the second rate pause since the central bank started its monetary policy tightening last May.

While the RBA’s latest cash rate movement may signal a shift towards favourable lending conditions and lower financial strain, PropTrack’s senior economist, Paul Ryan, warned the cycle is far from over.

“The RBA held the cash rate target steady today. Nevertheless, the RBA signalled that more tightening may be needed to rein in inflation, with many expecting another hike to come as early as next month,” Mr Ryan stated during the announcement of the decision.

Mr Beardmore-Gray gave a similar forecast, stating interest rates in the country are “likely to rise a little further,” which indicates “pressures on real estate capital values are likely to remain this year.”

However, he said “a return to stronger economic growth” in the upcoming year, combined with declining interest rates, is expected to lead to a notable improvement.

He noted most forecasts in the country have the cash rate experiencing one or two more increases before being cut in 2024 as inflation eases.

“The themes we are seeing around the world are fully reflected in Australia, with plenty of cause for optimism in commercial property markets next year and beyond.”

Knight Frank’s research showed activity in capital markets has experienced a slowdown since 2021, and there remains a lack of transactional evidence to provide definitive insights into the precise movement of property values.

Mr Beardmore-Gray said while there was strong underlying demand for Australian assets from major institutional and private investors, many were prepared to stay on the sidelines and wait for greater clarity on the outlook.

“We expect deal momentum to gradually pick up once the Federal Reserve in the United States and RBA signal that they have reached the peak of the rate hike cycle as this will help instil greater confidence in the outlook and shift the focus to potential rate cuts in 2024 to 2025,” he remarked.

In the APAC region, the expert noted Japanese investors are “quite active at the moment and are a key source of demand for larger deals,” due to their relatively low cost of debt.

Looking forward, Mr Beardmore-Gray expressed his belief that there are significant opportunities for well-capitalised commercial real estate developers to secure prime sites and deliver new or upgraded spaces in the upcoming year.

He explained there is a lack of high-quality, best-in-class office and commercial space and a need for greener and more environmentally friendly buildings in most major markets to meet more exacting occupier requirements and tighter environmental regulation.

“We also believe there will be strong opportunities in the best located logistics properties, living sector accommodation and some specialist sectors, including healthcare and data centres, which are likely to receive a boost from AI data requirements,” he concluded.