Article | Intelligent Investment
Investing in Australia's Property Future: Opportunities and Challenges Across Key Sectors
CBRE’s Phil Rowland and Sameer Chopra identify the rising investment opportunities and challenges in Australia’s evolving property landscape.
April 30, 2024
Fresh investment opportunities are beginning to materialise in Australia’s commercial property landscape in 2024.
These strengths come off the back of a challenging period in the property market cycle, making it equally important to identify headwinds that could limit growth in specific sectors.
In the latest episode of Talking Property: The House View, CBRE’s Pacific Advisory Services CEO, Phil Rowland, and Pacific Head of Research, Sameer Chopra, provide their industry insights on the health of Australian retail, office, industrial, and living sectors.
“A lot of good investment ideas are spending more time than usual in due diligence or have stalled for now,” he says.
Rowland agrees and adds that there isn’t a shortage of capital that has got conviction on Australian real estate, but finding the right strategic capital partner at the right pricing that's ready to commit now is proving to be the main challenge.
Through his client discussions, he also reveals that investors are looking at ways to improve operational and cost efficiency through this period of compressing margins. Clients are also focusing on determining the sources of capital that line up with the strategies and the development pipelines of local investors and developers. This is followed by determining where to deploy that capital geographically.
“Sydney remains a priority market, but when you look at the data, there are parts of Australia such as Brisbane and Perth indicating some better returns,” says Rowland.
Chopra has been a longtime supporter of quality and liquidity and believes that the Sydney market will continue to command that particular premium.
“We've typically seen that at 25 to 50 bps of better yields in Sydney. It's a very safe choice for investors, particularly when they're dipping their toe for the first time. But in consumer-facing sectors like residential, retail and hotels, you can afford to extend your horizon and look at cities like Brisbane and Perth which are indicating better returns.”
“Firstly, we've got this booming population and retail spend is expected to grow to about $500 billion by the end of this decade, sitting at about $420 billion right now. So, you've got this very strong demand,” explains Chopra.
“Secondly, new supply for shopping centres is around half of what it's been historically, and this drives up the productivity of shopping centres, which is a big reason why my US colleagues turned positive on the sector.
The experts also highlight other supporting factors of the retail resurgence as increasing return to work rates, Australian shopping centres being underpinned by daily needs supermarkets, and occupiers continuing to evolve their e-commerce strategy to adopt a more omnichannel approach.
Return to work has seen a strong uplift in the early part of 2024 and jobs growth has been positive. On the pricing front, Chopra said cap rates expanded by about 50 bps in the second half of 2023.
“The latest conversations we've had with our own CBRE brokers and valuers suggest that we're getting close to stabilisation for that prime CBD stock.
“Having said that, getting capital to actually take an active position in office is a whole different matter.”
Vacancy is expected to remain below 1 percent for the next five years while rents are forecast to grow 28 percent over the same period.
“My view is that this annual demand-supply mismatch is not going away anytime soon, and consumers are just going to need to navigate these higher rents through a lot of different avenues,” says Chopra.
But could the sector see space come back onto the market as the strength of demand from occupiers starts to moderate?
“We were expecting a lot more sublease space coming back into the market in late 2023, but this never eventuated at a scale where it causes market disruption,” says Chopra.
“Even as we speak today, our rent numbers are moving in a flat to mid-single digit type growth rate for 2024.
“There is a sense right now that supply chains destocked quite considerably during last year, in anticipation of soft consumer demand. We saw inventory levels come down by about 2 percent through the course of last year, but we've had these recent issues with Australian ports getting blocked and global shipping. This is making clients rethink whether they should have more inventory sitting in Australia.”
These strengths come off the back of a challenging period in the property market cycle, making it equally important to identify headwinds that could limit growth in specific sectors.
In the latest episode of Talking Property: The House View, CBRE’s Pacific Advisory Services CEO, Phil Rowland, and Pacific Head of Research, Sameer Chopra, provide their industry insights on the health of Australian retail, office, industrial, and living sectors.
Decoding investor sentiment
While there’s broad agreement on some of the longer-term tailwinds for Australia’s real estate market, more conviction is needed when it comes to the strength of future rent growth, exit values and in some cases the regulatory environment, according to Chopra’s overview.“A lot of good investment ideas are spending more time than usual in due diligence or have stalled for now,” he says.
Rowland agrees and adds that there isn’t a shortage of capital that has got conviction on Australian real estate, but finding the right strategic capital partner at the right pricing that's ready to commit now is proving to be the main challenge.
Through his client discussions, he also reveals that investors are looking at ways to improve operational and cost efficiency through this period of compressing margins. Clients are also focusing on determining the sources of capital that line up with the strategies and the development pipelines of local investors and developers. This is followed by determining where to deploy that capital geographically.
“Sydney remains a priority market, but when you look at the data, there are parts of Australia such as Brisbane and Perth indicating some better returns,” says Rowland.
Chopra has been a longtime supporter of quality and liquidity and believes that the Sydney market will continue to command that particular premium.
“We've typically seen that at 25 to 50 bps of better yields in Sydney. It's a very safe choice for investors, particularly when they're dipping their toe for the first time. But in consumer-facing sectors like residential, retail and hotels, you can afford to extend your horizon and look at cities like Brisbane and Perth which are indicating better returns.”
Riding the retail resurgence
The pandemic may have wreaked havoc with the retail sector in recent years, but that storm has since passed, and positive signs are now returning to the sector. Where’s this positive sentiment coming from?“Firstly, we've got this booming population and retail spend is expected to grow to about $500 billion by the end of this decade, sitting at about $420 billion right now. So, you've got this very strong demand,” explains Chopra.
“Secondly, new supply for shopping centres is around half of what it's been historically, and this drives up the productivity of shopping centres, which is a big reason why my US colleagues turned positive on the sector.
The experts also highlight other supporting factors of the retail resurgence as increasing return to work rates, Australian shopping centres being underpinned by daily needs supermarkets, and occupiers continuing to evolve their e-commerce strategy to adopt a more omnichannel approach.
Office in the eye of the storm
Office remains one of Australia’s more challenging sectors in reinvigorating investor momentum. When looking at the fundamentals specifically, Chopra believes the signs do point to good demand for office space.Return to work has seen a strong uplift in the early part of 2024 and jobs growth has been positive. On the pricing front, Chopra said cap rates expanded by about 50 bps in the second half of 2023.
“The latest conversations we've had with our own CBRE brokers and valuers suggest that we're getting close to stabilisation for that prime CBD stock.
“Having said that, getting capital to actually take an active position in office is a whole different matter.”
Residential demand vs dwindling supply
CBRE’s in-house research shows that demand for residential is significantly outstripping supply in Australia. Supply over the next five years will hover around 50,000 to 70,000 apartments, while demand is running at 75,000.Vacancy is expected to remain below 1 percent for the next five years while rents are forecast to grow 28 percent over the same period.
“My view is that this annual demand-supply mismatch is not going away anytime soon, and consumers are just going to need to navigate these higher rents through a lot of different avenues,” says Chopra.
Industrial space supply and demand
When looking at sectors with low vacancies and strong rental growth, industrial often presents itself as a frontrunner.But could the sector see space come back onto the market as the strength of demand from occupiers starts to moderate?
“We were expecting a lot more sublease space coming back into the market in late 2023, but this never eventuated at a scale where it causes market disruption,” says Chopra.
“Even as we speak today, our rent numbers are moving in a flat to mid-single digit type growth rate for 2024.
“There is a sense right now that supply chains destocked quite considerably during last year, in anticipation of soft consumer demand. We saw inventory levels come down by about 2 percent through the course of last year, but we've had these recent issues with Australian ports getting blocked and global shipping. This is making clients rethink whether they should have more inventory sitting in Australia.”