Kathryn House
Hello and welcome to our quarterly Talking Property series, The House View. Together CBRE's Australia and New Zealand CEO, Phil Rowland, and Head of Research, Sameer Chopra, investigate what's next for the Australian property sector, the potential disruptors, emerging opportunities, and what's top of mind for the industry's major players. We hope you enjoy their conversation.
Phil Rowland
Hello, I'm Phil Rowland, and it is great to be back with CBRE's Head of Research, Sameer Chopra, for our second edition of The House View for 2025. In this episode, we'll cover the usual bases of what we're seeing in the market in Australia and internationally, but we thought we would tackle a couple of important topics that are top of mind as we look to the future in Australian property. Melbourne; is it more of a question of ‘when’ rather than ‘if’ as a destination of capital and infrastructure, including social infrastructure? Where are we on this development journey and what are the implications and benefits for the property sector? And finally, we'll have a quick check on our full year predictions that we made in January to see what early signals that we can see. Before we dive in though, Sameer, a lot has happened in the last three months in a global context, an immense amount of economic and geopolitical upheaval, primarily driven by the US administration getting to work on its policy program. But whether you believe in it or not, one thing is very clear and that is it continues to make the current operating conditions very volatile and uncertain. So as you think about the world today, Sameer, what do you make of this?
Sameer Chopra
Phil, the early months of 2025 are certainly a lot more dynamic and uncertain than what we'd hoped and planned for. When I think about all the change and uncertainty in the system right now, I often find myself going back to that conversation we had at our recent CBRE Executive Committee meeting in February where we talked about the power of optimism, the simple principle that during times like this, it's really important to look through the noise and just stay optimistic.
Phil Rowland
Yes, it was a good conversation. And look, it is super important for any organisation to stay the course at the moment. There's an immense amount of change going on, and it comes at a time when the property sector is coming out of a very challenging period. We're still carrying all the disruptions and the structural changes from COVID, the enormous drag on activity from a highly restrictive interest rate cycle, which of course has placed a big drain on returns and operating earnings. So you're right, Sameer, keeping a sense of optimism at this point in the cycle is critical. But of course, this needs to be pragmatic optimism, not blind optimism, but staying centred on your strategy, looking through the headwinds that are transitory versus structural, and I suppose keeping your conviction on the areas where you have a right to win is just so important right now.
Sameer Chopra
Yes, look, no doubt there's a lot of noise over the past two years which has caused a number of investors and occupiers to pause or take longer just to make decisions, tariff wars, local property taxes, inflation, high interest rates, and of course we've got these persistently high construction costs.
Phil Rowland
Well, that's right. And these things will test your conviction. We've all built well thought out strategies that take these variables into account, and this is why it's just so important to look to the longer-term fundamentals of why. You and I often talk about Australia's population growth, demographic changes, technology and aspirational economy, energy efficiency. There's really a lot to be optimistic about.
Sameer Chopra
Yes, Phil, we've been advocating the case to buy now and occupy now, and that's because there's a small window for clients to gain scale and get access to stock as markets start to recover. This is for both investors and occupiers.
Phil Rowland
Yes, totally. Getting scale in your areas of capability and conviction, whether it's living, office, logistics, this is all about looking through the noise and staying true to your plan. So good call out there, Sameer, I think that was good context. Okay, so enough of our pontificating. Why don't we switch gears and talk about the market trends. What's on your mind right now and what are our teams seeing on the ground?
Sameer Chopra
We've just had a period where industrial rents have grown by about 70% since 2021. Residential rents have also grown by about 40% since 2021. It's just extraordinary. But rents in both of these sectors have now been flat-sh over the last six to nine months. So the immediate question that keeps coming up is, is this the end of the cycle? And my view is I think not. My view is that we're in a period of exhaustion, fatigue after the rapid hikes, occupiers and investors have just digested some really large rent increases, so there's some fatigue there. But next year as the market comes to appreciate the lack of supply and another bout of tightening vacancy, rents will inflect higher again. And maybe the next uptick is around half of the more recent one, but rents are likely to move higher and much higher in my view.
Phil Rowland
I can certainly see that in residential where apartment supply is likely to remain pretty subdued. I think we are forecasting around 40% of previous peak and vacancy is still sitting around 1%. But in logistics, vacancy has increased in each market, and in '24 and '25 we've got new peaks in supply. What's the outlook for supply and what do you think are the implications around things like CAPEX and incentives, Sameer?
Sameer Chopra
In logistics, there has been a pick-up in incentives. It's sitting at around 15% in Brisbane and over 20% in Melbourne. And there is scope for it to continue to tick up slightly in the near term. But just talking about supply, we are keeping a very close eye on whether this new mooted supply does materialise.
Phil Rowland
Look, I suppose it's important to note that the sector's still laboured with high construction costs and delays in enabling infrastructure like roads and power and telecoms. You hear that a lot in talking to customers. How's this playing out in terms of development feasibility?
Sameer Chopra
Phil, we look at this through this concept of economic rents and the economic rents needed to sort of activate new projects is challenging in almost every precinct. Just staying with logistics, in Sydney's Western markets, the economic rent now is about $270 to $300. In Melbourne, it's about $180. In Brisbane, it's $160. In Perth, it's $155. This is about 30 to 40% above where current market pricing is sitting. So this will continue to weigh on approvals for new supply.
Phil Rowland
Just jumping into office, Sameer, all the same challenges prevail, arguably more acute, but we are seeing small pockets of the market like Prime Sydney core and Brisbane CBD seeing an emerging story with 25 to 35% rental growth since 2021, which really does fly against the narrative of office being a troubled sector. What do you make of that?
Sameer Chopra
Phil, one of the more interesting things I've been tracking is the relative performance of office and particularly Australian office in a global context. So if you look at rent growth across most global sector city combinations, so for example, if you're looking at industrial in Los Angeles, industrial in Hong Kong, industrial in Osaka, residential in Dallas, London, Tokyo and office in Manhattan, Milan, Singapore, what we saw was that Sydney CBD core and Brisbane CBD core office rent growth was exceptional when you compared against this basket. They're amongst the top tier of growth rates and the top 5% in the basket. And I think this improving narrative around office led by Sydney CBD and Brisbane CBD could really help bring more buyers back to the market.
Phil Rowland
As we've been pointing out over the last six months or so, there really are some improving net absorption trends, particularly coming out from the US, and plus our CBDs are now more vibrant and in many cases back to 2019 levels. So the tougher aspect of office has been elevated levels of incentives. Can we see any signs of improvement there?
Sameer Chopra
Phil, look, incentives are still challenging. My colleague, Tom Broderick, makes quite an interesting point that incentives are lower for renewals compared to relocations. We're also seeing higher and faster rent growth in the high-rise levels compared to the low-rise levels of office towers because occupiers are competing for these exceptional properties. So for exceptional property, incentives are stabilising, maybe coming down for the rest. There's still some room to go.
Phil Rowland
And this is a continuing theme of exceptionalism that we talked about in our last episode. So we've also been constructive on retail over the past couple of years, highlighting this lack of supply where most development at the moment is aimed at either new population growth corridors or very targeted redevelopments that can leverage the unique strength or location of an existing asset.
Sameer Chopra
The bigger picture if you want to take an optimistic tone, is that demand across every sector will outstrip supply over the coming decade.
Phil Rowland
What about the relativity to global asset pricing? When you think about that, Sameer, are there any Australian sectors or geographies that you think screen as being particularly attractive?
Sameer Chopra
Interestingly with the cap rate expansion that we've seen in Australia, actually logistics and office screen well on a global context. Maybe I'll just walk through some of these details. So in apartments, cap rates globally are in a range of 3.5-5.5%, and the Australian assets are trading in the low 4% range and have a tighter spread to bond yields than global peers. In logistics, the cap rates globally are 3.7-7%, quite a wide range, and the Australian assets have cap rates which are at the high end of that range, potentially making Aussie logistics quite an attractive opportunity in a global context.
Phil Rowland
Well, we've seen really good participation from offshore capital and some of these recent logistics acquisitions and capital raisings we've been doing across the eastern seaboard.
Sameer Chopra
And in office, the spread of cap rates globally for good prime assets, it goes all the way from the low 3% up to the 7% sort of range, and the Australian assets have cap rates which are at the high end of the range. And the core CBD assets, now I'd say you've got very good rent growth with pricing that's a lot more attractive in a global context. So, they look attractive. And just to round it out, Phil, in shopping centres, the spread of cap rates globally for prime assets is 5.3% up towards 8%. The Australian assets are much tighter than many of their global peers, and I think that just reflects that people have more conviction around our population growth and also just the lack of supply.
Phil Rowland
Well, talking about capital allocation, one of the other big questions on everyone's mind is about Melbourne, a lot of discussion about how investable the market is right now, particularly for international capital, given the taxation environment amongst other things. And given our earlier point about the importance of looking through cycle, I wanted to talk a little bit about Melbourne focusing on what is challenging, but more importantly, what its comparative advantages are and what it will take to, I suppose, tip the scales so to speak.
Sameer Chopra
Phil, Melbourne is very topical. It's a puzzle for most investors. Assets in Melbourne have repriced in a relative sense. Previously, Melbourne cap rates would be 10 to 15 bps higher than Sydney, like for like. Now that spread is around 100 to 150 bps. So no doubt Melbourne screens as value for investors, I don't think it's a question Phil of why or if Melbourne, but rather when Melbourne?
Phil Rowland
Well, that's right, the long-term fundamentals for the why Melbourne story are unchanged, they are well-known. Faster population growth, great logistics infrastructure, lower cost of living, even rents make it significantly more affordable than Sydney and Brisbane. Typical prime office rent is 55% cheaper, industrial rents are 51% cheaper and residential 33% more affordable. So this isn't necessarily new, but it is an important dynamic.
Sameer Chopra
Yes, but there's still some uncertainty around where does the taxation in Melbourne level out and whether there's any further risk in that sense around taxation. Currently, we also have softening vacancy, and you've got this leakage in outgoings from taxes. At least one of those is off the table. And I think, Phil, the market healing process can begin.
Phil Rowland
Well, that really brings us to the question, of when Melbourne? So the market will ultimately recover, right? The question is when and what shape it will take. If you look around other markets that have been through cycles like this, what can we learn from those?
Sameer Chopra
Well, looking at markets where we've seen this structural hit, it can take some time. I'm thinking about shopping centres in the UK and the US, the office and residential markets in Perth and Adelaide, looking at these comparators. In these examples, it's taken five to ten years to win back market confidence.
Phil Rowland
So putting tax aside, what are the indicators that you are looking at?
Sameer Chopra
Phil, outside of tax, we would need to see a period of vacancy normalising. Currently in office, vacancy is in the high teens in Melbourne CBD, and in logistics possibly trending to around the 6% type level by year-end. It could take a few years of very subdued supply discipline to return vacancy in office back towards the low teens and logistics up towards 4%. But if investors start to see a pathway to this fast-falling vacancy, then they can step in earlier. But for now, I would say it'll take time for recovery to take hold.
Phil Rowland
So in retail and residential and hotels and social infrastructure, this vacancy issue doesn't really exist. So could you be more constructive in those sectors?
Sameer Chopra
That's right. The only caveat would be if investors want to wait for the state elections, they're about 18 months away, in a period of fiscal rightsizing before activating capital. So one thing is that when confidence returns, Phil, there could be a flurry of acquisitions and maybe not enough stock to go around.
Phil Rowland
Just changing topics a little bit, Sameer, one of the root causes behind higher property taxes and development charges has been the rising debt and obviously the fiscal burden for state governments. And clearly Victoria is not alone there. The states have all invested in large-scale infrastructure programs, and as you and I have discussed before on these episodes, the infrastructure program in Australia brings a tax burden, but importantly it brings that comparative advantage for Australia for very strong development.
Sameer Chopra
Phil, and the good news is the benefits from these programs, they are going to really start to hit home from 2026 onwards. We've got large projects which are due to hit completion very soon, in the next 24 months. That includes Westgate Tunnel in Melbourne, the Western Sydney Airport. We've got new metros, the link between South West Sydney to Bankstown and Melbourne Metro. All of these are going to hit completion in the next 24 months.
Phil Rowland
And they will all make a material impact on the movement of people and goods around the economy. And the Queensland government giving the go-ahead for a new Olympic Stadium and the infrastructure program is unlikely to subside near-term. I think the Queensland government is likely to spend $23 billion in '25, which is 40% higher than '24 levels.
Sameer Chopra
We're still in the thick of major road and rail infrastructure upgrades. And this will put upward pressure Phil, on construction costs. We're assuming 5.5% per annum in our forecast over the next four years. Or to put it another way, a project that's commencing in the later part of this decade will have 20% extra build cost than one that's finishing today.
Phil Rowland
Well, I suppose no more important consideration is the impact on housing delivery. Are your forecasts starting to see a pick-up in delivery around these new rail corridors?
Sameer Chopra
Not yet unfortunately. We build a bottom-up view of apartment delivery. We look at every individual project that's likely to complete. And I've got three takeaways from a recent audit that we did. One is we're expecting a material dip in 2026 as a lot of projects slip out into 2027. Every year the apartment shortfall is running at 10 to 15,000 per annum. Out to 2029, build to rent will become more meaningful to apartment delivery, but it's still only about 9% of the forward pipeline. So you know what this means, Phil, is that we expect vacancy to fall further, it'll sit below 1% and then rent growth will be faster than inflation over the medium term.
Phil Rowland
Well, there's certainly been a lot of focus from government and industry to address all the planning and taxation settings to support housing, and that's going to need to continue. So just sticking with the theme of social infrastructure for a minute, Sameer, we'd previously spoken about childcare. The government has removed the activity test for subsidised childcare, making it easier to access the service. This should provide a boost to Australia's workforce.
Sameer Chopra
Yes, look, the participation of women in the workforce has increased to nearly 63%. That's about a 20% lift, by the way, Phil, over the last 40 years. Easy access to childcare has played a key role in this. One of the issues with the broader adoption of childcare is just the daily cost, the fees. Our colleague Jimmy Tat highlighted that most common price points in Australia are around $130 to $150 a day per child.
Phil Rowland
And there's around 660,000 places which service around 45% of children aged zero to four years old, and so that 45% figure suggests a lot of headroom to develop new stock.
Sameer Chopra
Like every other sector, you've got high construction costs and interest rates and they've dampened future supply. If you want to close out that 45% gap, supply is still challenging. Historically, we've built around 300 centres per annum at a national level, and CBRE's social infrastructure team forecast this will drop to about 100 by 2027. So the demand supply imbalance could see rents accelerate. Occupiers are acting on this. We are seeing the industry evolve towards longer lease terms, almost similar to what we've seen in healthcare Phil, triple net leases, 15, 20 years lease terms.
Phil Rowland
Yes, and the top 10 operators account for around 20% of the stock, so there's significant scope for the industry to scale up through acquisition. All right, that's good, Sameer, thank you. So before we conclude this podcast though, let's do a little recap of the four predictions we made at the start of the year and let's just see if there's any early reads we can make on those.
Sameer Chopra
Phil, prediction one was on interest rates. While our forecast assumed three cuts, my non-consensus lone wolf call would be for four cuts in 2025. Our second prediction is that we could see 10 to 25 bps of cap rate compression this year, and that's for exceptional real estate. I would expect to see that in premium office in Sydney CBD core and in Brisbane, also prime logistics, we would expect to see that in regional shopping centres and Sydney and Melbourne PBSA. So cap rate is starting to come down 10 to 15 bps this year.
Phil Rowland
I can feel another bet coming on your first prediction by the way. Okay, so prediction three was that we would get an improvement in leasing velocity in the second half of '25 as we cycle past interest rate cuts and get through the federal election. I think it's a little earlier to call this one, but I would say that the volatility we're seeing and that we sort of talked about earlier, Sameer, in the first three months of the year, this is really weighing on occupier confidence that it's starting to flow through into leasing.
Sameer Chopra
Yes, and look Phil on the last prediction was that we'll see a lot more pressure for five days return to office in some sectors, particularly in financial services and government. And just looking at the traffic flow right now around the city, it just feels very busy, almost back to pre-COVID levels. So I think I've high confidence on that one.
Phil Rowland
I agree with that. All right, so I think that wraps us up. Thank you, Sameer. And thanks to our listeners. I hope you enjoyed this latest edition of The House View. As always, you can send us your feedback and any questions that you might have to
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