19 December 2023
Amongst analysts and participants, there is a consensus that 2023 whilst challenging, was not without opportunity.
Although the CBD office market was certainly rattled and values in the lower grade office assets weakened, other property sectors managed to maintain reasonable transaction volume. The industrial and logistics sector, land subdivision, ‘value add’ opportunities in the commercial sector generally and the ever-resilient residential sector, particularly in urban established housing, have performed well, despite elevated interest rates, equity constraints and the economic uncertainty.
Notwithstanding the very worrying housing crisis, which should be a real concern to us all, the apartment market has been cool due to high construction and development costs which will remain a challenge into next year. There has been a flicker of interest in the emerging residential Build to Rent (BTR) sector and whilst the accommodation crisis and increasing rent levels should favour more activity, the financial structures are complex, particularly the need to attract longer term patient equity.
Regional areas in anticipation of long-term population growth have increasing interest by those generational investors prepared to take a long ‘pipeline’ approach to capital gain. Within the metropolitan areas, there has also been a very discernible increase in demand for existing building opportunities that offer refurbishment margins, the attraction being shorter project periods, less planning, existing building mass and innovation.
Moving into 2024 I think the market will be very similar to 2023 as the fundamentals including interest rates and production costs will remain elevated. Trickling supply into the housing crisis won’t be enough to have any discernible impact, immigration may reduce a little, but will still be strong, and the larger managed property funds will be focused on restructuring and portfolio alignment. What may be the difference to 2023 however is that there may be greater confidence that the interest-rate cycle has peaked and that inflation, moving in a downward direction will herald the beginning of lower interest rates, although realistically not until early 2025 and if so strengthening markets generally from mid-2026. Asian investment into Australia, particularly Melbourne and Sydney is likely to increase and purchaser acceptance of necessary higher prices will be the catalyst for an increase in apartment production. Already, the generational demand by ‘downsizers’ is demonstrating a strong demand for their ageing lifestyle solutions, regardless of pricing.
Over the next several decades Australia will experience significant changes as our population moves towards doubling by 2070 and its composition transitions to likely an Asian majority. There will be an inevitable increasing wealth divide and households which rent will increase substantially, institutional ownership of residential accommodation will increase significantly and regional areas will play a much more significant role in hosting a bigger population. These changes are already beginning and strategically researched engagement even now, should provide, for patient capital, enormous capital gain for future generations.
Chairman, Charter Keck Cramer