Clever strategy and resilience will be essential tools for commercial property stakeholders in the next 12 months. With the Australian government forecasting economic growth of just 1.5% for 2023-24 and inflation to hit 7.75% by the end of the year, some observers are expecting to see a rise in stock on the market as owners shift to more recession-proof assets and cash. Even so, several major real estate firms are erring towards 2024 being a better year for investors, with commercial property markets bouncing back in light of projections for a 10% lift in national population growth over the next five years. Others such as Ray White Commercial remain cautious and warn stakeholders to expect more hard yards ahead before a return to easier times.
Markets within markets
The next 12 months will “continue to be difficult,” says Ray White Commercial’s head of research Vanessa Rader. “For many owners it will be a case of treading water and surviving the year with prolonged elevated finance costs until some relief emerges in 2025.” Ms Rader adds that receiver sales are likely to increase regardless of type and location. Already across Ray White’s Western Sydney offices, mortgagee in possession sales account for approximately 10% of total listings. This time last year they were virtually non-existent.
Of course, there will always be those in a position to take advantage of others misfortune. “Savvy private investors, opportunistic purchasers and new syndicates will emerge to capitalise on the difficulties of some owners to hold their assets,” Ms Rader forecasts. Also, some markets are performing far better than others. Sydney’s Northern Beaches is proving remarkably resilient says Upstate Real Estate commercial’s Vince West with a revised masterplan for the suburb of Brookvale involving large scale residential and commercial development is already attracting investors’ attention. “The Northern Beaches market has a relatively finite supply of commercial properties,” Mr West says. “As such we forecast property price growth to remain relatively strong and perhaps even outpace the national average rate of 6.5% per annum over the next five years.”
Prepare for multiple scenarios
Australia-wide commercial property enquiries were down almost 20% last year and values suffered. But although the market appears close to hitting the bottom of the current challenging cycle, Knight Frank’s chief economist Ben Burston says higher interest rates will continue placing pressure on values.
When lower rates do reappear, they are unlikely to match the lows of 2016-2021 he warns in Knight Frank’s Australian Horizon 2024 report. “Investors will need to strategise for multiple scenarios,” Mr Burston says, adding that the silver lining on any cloud of reduced asset values is the prospect of cyclical recovery. “Higher yields act to reset the market,” Mr Burston says. “They do this by providing a more attractive entry point for investors, generating the prospect of higher returns.
Choose carefully
Historically, pricing resets in the aftermath of interest rate hiking cycles, Mr Burston points out. “The period immediately after the conclusion of the rate hike cycle ending in 1994, 2000 and 2010 was in each case a very attractive time to buy, achieving above average returns over the following five years,” he says.
“This is not to say that history will repeat, and investors cannot take for granted that interest rates will fall exactly as anticipated. But careful asset selection will maximise the chances of strong performance whether it is achieved through income growth or boosted by a return to yield compression as interest rates revert in 2024-26.”
So where to invest? The alternative sectors that proved stronger performers last year are the pick, especially anything related to residential living, sectors such as build-to-rent (BTR), student accommodation and retirement living, the Knight Frank report states. Within traditional sectors industrial as well as warehouses remain the pick. In recent years rents have grown the fastest across the industrial space and Mr Burston says tight supply is looking to remain a constant for the asset class rather than a cyclical occurrence.