After a tough few years for commercial property investors, weighed down by rising interest rates, 2024 has started better than experts had predicted.
Knight Frank’s Horizon 2024 report update found that conditions were improving, led by a more favourable economic backdrop, the gap between buyer and seller expectations getting smaller and an improved outlook for relative returns across asset classes.
Knight Frank Chief Economist, Ben Burston, said a window for commercial property investors was opening.
“Since October, inflation in the major global economies has fallen substantially, and as each month passes we are getting closer to a turn in the interest rate cycle, with Europe leading the way in shifting to rate cuts,” Mr Burston said.
“In Australia forward rates currently imply that the cash rate will drop by around 50 basis points by end 2025, and many forecasters are much tipping larger reductions.
“In addition, substantial progress has been made to narrow the first of two wide gaps that have prevailed since early 2022 – that between buyer and seller expectations – with valuations falling further in Q4.”
Mr Burston said the outlook for relative returns across asset classes had shifted, with the RBA becoming more dovish.
“This has effectively closed the second gap that has impacted sentiment over the past two years – the gap between pricing in public markets and slower moving private markets,” he said.
“More broadly, as prices in fixed income and equity markets have surged, while property values have continued to correct, the relative risk-return equation offered by different asset classes looking forward is changing
“During 2023, few were willing to deploy additional capital to real estate, but as pricing adjusts the outlook is looking more favourable on both an absolute and relative basis.”
Mr Burston said the three key developments taking place in the market this year would start to entice investors back
“After an extended period of inactivity, major domestic institutions and cross border investors will be reappraising the outlook and some will choose to flick the switch back to acquisition mode,” he said
“In addition, pent up demand from both investors and vendors to trade and reposition their portfolios continues to build and as the level of uncertainty around the outlook eases and downside risks dissipate, a deeper pool of assets will come to market
“This is not to say that it will all be smooth sailing.”
Mr Burston said the adjustment of formal valuations has still not entirely played out and will remain a brake on activity for the time being.
“But as time goes on, it will become apparent that the risks are two-way,” he said.
He said buyers waiting for the full suite of economic and pricing indicators to switch from red to green may end up waiting too long.
“History suggests that property markets can move quickly, and the best buying often comes hot on the heels of a downturn, as evidenced by the returns generated by the early movers who shifted into acquisition mode in late 2009,” he said.
