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 third edition of The House View for 2025. In this episode we'll explore some of the current upsides and downsides for the Australian property sector amid this ongoing global upheaval we are experiencing. But we'll also cover some of the trends that we've been observing across the office, retail, industrial and residential sectors.
Sameer Chopra
We'll also examine why private credit is playing such a growing role in funding Australia's real estate. And make sure to listen to the end when we'll be discussing some of the opportunities we're seeing around Australia's annual $100 billion infrastructure spend and the rapid growth that's occurring in the high net worth investor market.
Phil Rowland
Alright, Sameer, well, let's kick things off by looking at the macro picture. I was at the Property Council's Property Leaders’ Summit last month and the feedback from the various panels was that Australia continues to screen really well from an international perspective, particularly in terms of stability given the very volatile environment that we have in the world right now. There was a particularly interesting session on demographics that reinforced the comparative advantages of Australia, which of course in turn underpins the fundamentals of our sector. One of these advantages is continued population growth which is providing a strong tailwind for Australia's growth and prosperity. Now you've always been constructive on this point, Sameer, but of course population growth isn't a panacea. There are some clear and present obstacles for the property sector with taxation at the top of the list for investors, owners and developers. What's your take on this, Sameer?
Sameer Chopra
Phil, yeah, look, Australia does screen well, but I'm going to do something unusual and start off by being bearish. You know, I do worry about the tinkering and the uncertainty with taxation.
Phil Rowland
And Sameer, just to be clear, you're talking about the changes around superannuation and family trust.
Sameer Chopra
Yeah, exactly. You know, look, I'm less worried about things like tariffs and interest rates and more worried about the outlook for taxation of real estate. For me, you know, this uncertainty is the single biggest risk for owners and potential investors in the sector. You know, we can deal with investment cycles, but regulatory reset, you know, it can cause a more sort of permanent impairment of assets.
Phil Rowland
Yeah. And there have definitely been a number of questions raised about the taxation of unrealised capital gains, both as a philosophical issue, but importantly the basic investment issues that it creates.
Sameer Chopra
Yep, that's right, Phil. This may play out sort of more prominently in the private client space, I think initially. You know, for instance, imagine you're a shop owner, you know, a small food manufacturer who, you know, owns their own premises in their superannuation fund. Going forward, you may well need to start paying tax on capital values even though you have no intention of selling the premises that you're using.
Phil Rowland
Yeah, it's a deeply concerning piece of tax policy that comes at a time when the sector is already overly burdened with taxation and there's an obvious productivity impact with having to value assets every quarter. But it's also an enormous, if not untenable cash flow burden that is ultimately going to see capital exit the sector. But putting that aside for a moment, the demand side picture looks good Sameer. Australia's population grew by 446 odd thousand in 2024. And while growth has slowed this year, it is still well above the long-term average. Perth and Brisbane have the fastest population growth as they benefit from overseas and interstate migration.
Sameer Chopra
Yep, spot on. You know, like the big picture is that there's one new Australian for every six back in 2014, you know, so over the near term the population is expected to increase by almost two and a half million people Phil between 2022 and 2027. So this five-year period, that's akin to recreating Brisbane, you know, which is Australia's third largest city. And you know, if you pause and think about all the real estate that is in Brisbane, all the homes, the shops, the logistics, the office, the hotels, the hospitals, the childcare. That is the level of new demand for real estate that's being created across Australia over this sort of five-year period.
Phil Rowland
Yeah, look, our demographics are certainly an attraction for international investors. It's a picture that's very unique in the world. But it's not just about demographics. Ada Choi, CBRE's APAC research head, was recently in Australia and she called out our relatively stable economic profile, our tight vacancy rates, particularly in logistics and a rental growth outlook as factors that stand out for Australia. And, of course, Australia and the APAC region seems to be well positioned for interest rate cuts. Alright, so Sameer, let's just switch gears for a second and talk about some market trends. CBRE's preliminary data is suggesting that year to date, capital transaction activity has been pretty strong, particularly in retail and hotels. But with this backdrop of elevated uncertainty, we are seeing leasing sentiment soften a little bit. So let's go through what we're seeing on the ground.
Sameer Chopra
If I look in the office sector, leasing volumes have been soft in the second quarter. In most cities, face rents are still growing but leasing deal volumes were soft as we caught up with some of our national team members. That was kind of the number one thing that they were calling out.
Phil Rowland
And look, the global macro environment is clearly impacting sentiment, but there are some encouraging indicators. We expect vacancy to tighten up in core markets over that 2026, 2027 period as supply falls away. And in markets like the US there's been an encouraging trend over the past few quarters with some positive net absorption in many markets.
Sameer Chopra
Yeah, look, Melbourne office leasing has been one of the most sort of active participants in that second quarter. Some of this is due to the opportunity just for occupiers to upgrade because incentives are elevated right now. But, you know, I'd also call out that we'd like to see a shift away from professional services to more financial services and technology sector leasing deals. Financial services companies in particular, you know, should be feeling more confident now in how their workforce is returning to office. And just on office rents, we're seeing annual face rent growth of 4 to 5%. And you know, incentives in core locations have been broadly stable this quarter. They had started to compress, but now they're sort of more stable into this quarter.
Phil Rowland
And from a transaction standpoint, our office capital transactions teams have had a very busy quarter as the bid ask spread starts to narrow. So broadly speaking, it was around 100bps in 2023 and currently sits at about 25 to 50bps. There also seems to be renewed appetite from potential sellers to bring stock to market. And we're seeing this especially in Brisbane and Perth. So, Sameer, where are cap rates sitting?
Sameer Chopra
Speaking with our valuations and capital markets teams, cap rates were stable in office during the second quarter. For CBD locations, we're still seeing some slight expansion in the metro and fringe markets because there's not enough sort of deal evidence there. But you know, I'd say in CBD, grade A cap rates now are about low. 6% in Sydney, they're in the early seven, maybe 7.5% in Melbourne and 7.5% to 8% in Brisbane and Perth.
Phil Rowland
OK, well, let's move to industrial where leasing activity is showing some signs of picking up after a slowdown over the past two years.
Sameer Chopra
Yeah, you know, we're expecting a reasonable pickup in vacancy during the first half as new supply hit the market and take up was still playing catch up. But you know, actually the incremental growth in vacancy is maybe not as much as we'd expected. It's still sitting below 3%.
Phil Rowland
Yeah, yeah. And look, that would be characterised as tight by any global standards. And in many North Asian markets, industrial vacancies sitting at double digits.
Sameer Chopra
Yeah, part of the reason here, Phil, is, you know, we're still seeing issues in getting supply into the market in a timely manner. There have been a few delays in projects which have kind of helped keep a lid on vacancy, you know, and in logistics phase rents are growing slowly in the kind of low single digits. But there's been a slight creep up in incentives. Let's say incentives are up 2 to 3% over the quarter. This is something we discussed in our last podcast and it's coming to fruition. So net effective rent growth across most markets will be flattish through 2025 in my view. The positive story in industrial seems to be in cap rates. In Sydney, super prime cap rates have now declined from 5.33% to 5.25%. So capital values should hold up, maybe even go up a little bit during a period of flattish rent growth.
Phil Rowland
Yeah, that's encouraging. Well, two other sectors that we've seen strong recovery and recouped pre Covid occupancy levels in some cities, hotels and student accommodation.
Sameer Chopra
Yeah, look, our data showing that international student arrivals in the year to date to April was tracking plus 12% compared to last year. It's a lot more resilient than what we'd expected for 2025, but let's wait and see how it tracks over the second semester.
Phil Rowland
Yeah, okay. And international tourists are benefiting from new flight routes. I think there are now 60 new flights per week from destinations in Asia, Middle East and New Zealand. Of course, this has helped lift Brisbane and Perth occupancy to well above 2019 levels.
Sameer Chopra
And the flip side on that one, Phil, is also hotel supply, particularly in Sydney, remains very challenged. And so we're expecting 5.5% revenue per available room. So basically a revenue growth rate in 2025 and more generally in Australia, around 60% of new supply is now skewed towards the premium end. And that should support room rates over time.
Phil Rowland
Right. And look, I suppose tied to that, the segment of the market comprising ultra luxury lodges has seen room rates increase by 60% over the past five years, the missing ingredient in hotels has been the return of tourists from Hong Kong and China. This segment is still about 1/3 down from pre Covid levels, so a bit of room to move there, but as they return, it should help boost CBD retail.
Sameer Chopra
Yep. And you know, just talking about retail, by the way, one of my key learnings from Ada's recent trip to Australia was around the phenomena of Labubu dolls. Retail is such a fascinating sector with new trends in athleisure cosmetics, frozen yoghurts and now Phil dolls as handbag accessories.
Phil Rowland
I'll put that one on the Christmas list. All right. And in retail, there has been strong interest from both private and institutional investors in the last two years. And like, as a sector, valuations for shopping centres is held up well during this interest rate expansion cycle. And you'd expect retail to benefit from consumer spending as interest rates fall.
Sameer Chopra
You're baiting me, Phil. Don't get me started on interest rates. You know, I still expect there'll be another six cuts to go in this cycle. I expect we'll need to see, you know, mortgage rates that are well below 4.5% before the consumer really starts to make a meaningful contribution to economic growth.
Phil Rowland
Yep. Well, let's see where we land. All right, so talking about interest rates, you recently did a deep dive on private credit, Sameer. That is definitely a part of the real estate market which has seen exceptional growth and continues to attract interest from our institutional clients.
Sameer Chopra
Yep. Private credit is a really exciting part of the investment universe. We forecast that the size of the Australian real estate private credit universe will grow from about 50 billion currently to 90 billion by 2029. And just to sort of put this in context, you know, the whole of Australia's real estate sector is worth 12.3 trillion and debt finance for real estate is around 2.8 trillion. And that includes, you know, mortgages on homes. So contextually, you know, Australia real estate sector as a whole only has a gearing ratio of about 20%. It's very lowly geared.
Phil Rowland
So how does private credit fit into the real estate picture and why are institutions attracted to it? You were saying that there are around 15 to 20 institutions that are very active managers and there's also a significant pool of capital.
Sameer Chopra
If we look by segment, private credit penetration of real estate debt is just 0.3% of residential mortgage. This is a segment that's typically been dominated by the major banks. Private credit's penetration of residential development is about 26%, so about 1 in 4. And it's about 4.2% of commercial asset debt on offices and logistics and retail. So it's still early days.
Phil Rowland
Yeah. All right, so two large buckets. Where we see private credit active is certainly in residential development and also to support commercial assets.
Sameer Chopra
Yeah. And look, borrowers typically access private credit to get flexible terms. You might want a higher loan value ratio because you might be looking to acquire an asset that still needs DA approval to realise its full potential. Or maybe you've just bought something and you need bridge finance. Typically these loans come with shorter maturity but with higher interest rates. So if you're an investor in a private credit fund, it provides an opportunity to get returns which could be 3 to 5% higher than your normal sort of term deposits, but with a different risk setting.
Phil Rowland
Yeah. And if you think about market timing with capital values and the interest rate trajectory, what are the factors that one should think about when allocating capital?
Sameer Chopra
If you look, I would say that as construction cost risk becomes less of an issue, like it's a known known right now. And likewise as interest rates start to come down, these will become less of a risk issue for investors. In private credit. One of the bigger risks, or better expressed as a hindrance to returns, is facility utilisation. It's a bit technical, but as most loans in private credit have a short duration, private credit lenders need to constantly source new opportunities to lend. And if there are periods when the lending book is not fully utilised, then you have lower returns.
Phil Rowland
Yeah, well, private credit definitely saw strong interest in our Global Investor Intentions survey where it sat third place alongside segments such as data centres and senior living. Alright, so just changing direction for a second. The residential market seems to be showing some signs of life picking up after the recent interest rate cuts. Auction clearance rates have settled above 70% and even days on market for apartment rentals are reducing to around three days from 21 to 18 days. So how might this play out over the next few quarters? Samee?
Sameer Chopra
I'm going to go out a little bit more on a limb here, Phil. I think buyers and renters might be caught out just by the extent of price movement over the next 12 to 18 months. You know, most teams out there are forecasting mid-single digit growth in price and sort of low to mid-single digit growth in rents. For residential, I would suggest that price growth could well be in the double digits and rents maybe up in the high single digits. As we travel through 2026, you know, just the elevated and growing cost of bringing, you know, new apartments, new houses to the market are the real kind of drivers behind this.
Phil Rowland
And how do you see this sort of interplay with housing affordability? You know, interest rates are helpful, but there's a limit to this when affordability comes into the question.
Sameer Chopra
Yeah, Phil, our maths is that each 1% cut in interest rates provides an 11% boost to affordability. So if interest rates come down by say, one and a half to 2% over the current cycle, then that removes 15 to 20% of the affordability issue. We think interest rates give two thirds of the affordability relief and the other one third of the affordability comes through just income growth, people getting, you know, paid more.
Phil Rowland
Yeah, all right, well, we'll no doubt have to do a pulse check on that one next quarter, Sameer. So now resi is just one of the sectors set to benefit from Australia's booming infrastructure spend, which is now circa $100 billion a year, double what it was a decade ago. But the other sector that benefits from all this infrastructure development is logistics.
Sameer Chopra
Yeah, look, logistics and apartments are likely to be the two largest beneficiaries of all this infrastructure investment in Australia. Our own very detailed scans show that airport, rail and road transport account for the majority of the recent large investments being put in by government.
Phil Rowland
Yeah, well, like Sydney Metro, Melbourne Metro, we've got the Brisbane Cross River Rail, Perth Metronet and the Canberra Light Rail all set to provide new opportunities for high density apartments and faster commutes for CBD and of course, fringe office workers.
Sameer Chopra
And then, you know, you can add on initiatives like WestConnex, Melbourne's Westgate Tunnel, you know, Adelaide's North South Connector, you got the Coomera Connector, then you got the Western Sydney Airport. All of these, you know, collectively just going to massively move the dial on logistics efficiency. And while we're constructive on opportunities, I'd say on the flip side is that we've seen a number of project delays. And of course, you know, governments also imposed a lot of developer levies to try and recoup some of the costs of rolling out this new infrastructure.
Phil Rowland
Yes, additional burdens. So, Sameer, just to finish off, one of the more resilient parts of the investment universe has been the private and high net worth segment. We know they can be counter cyclical and invest when institutions are on the sidelines. So they're a very important source of liquidity in the market.
Sameer Chopra
Yeah, Phil, look, there's about 2,000 family offices in Australia and you know, most will have some exposure to real estate. And just to kind of provide a sense of the depth in the market, Phil. You know, the Australian Financial Review noted that there's actually about 161 billionaires in Australia. I'm just amazed at that. And while family offices frequently outsource some of their share investing, both domestic and international share investing decisions, they tend to take a more hands on approach to real estate and to private credit and private equity. And in many cases, real estate makes up about a quarter of their wealth.
Phil Rowland
Yeah, yeah. And globally, family offices, of course, are very attuned to geopolitical and regulatory risk. I think it was a recent Deloitte survey. This risk ranks higher than succession planning and family disputes within these family offices. So the relative safety of the Australian regulatory environment, the stable economy and investment markets is going to continue to be a draw card for local and Asian family offices. Well, I think that's a wrap. Thank you, Sameer, and thank you 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 via talkingpropertybre.com we will be back with The House View in Q4, so make sure to subscribe to Talk Talking Property so that you don't miss that one or any of the fortnightly Talking Property episodes with our wonderful Kathryn House. Until next time.
