This article is from the Australian Property Journal archive
2024 is looking to be a better year for commercial property investors, thanks to a more favourable economic backdrop and shrinking gaps between bid-ask spreads and pricing in public and private markets.
According to Knight Frank’s first quarter update on its Australian Horizon 2024 report from last November, forecasts are on track for a better 2024 for investors with the macroeconomic landscape looking more optimistic for commercial property returns.
“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,” said Ben Burston, chief economist at Knight Frank.
“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.”
The Q4 CPI has dropped to 4.1%, with the latest monthly inflation indicator revealing an annual rate of 3.4%.
The gap between buyer and seller expectations has also been narrowing since the original report was published, with valuations falling over the last quarter of 2023.
According to the MSCI All Property index, valuations were down a further 2.5% on average in the last quarter.
This reflects an average asset value decline of 7.7% since peaking in Q3 2022.
“Finally, the outlook for relative returns across asset classes has shifted, with the shift to a more dovish posture on the outlook for base rates generating a strong rally in bond and equity markets globally, with Australian REITs mounting a strong comeback,” added Burston.
“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. 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.”
The ASX has seen a 10% since its October low, with the AREIT Index climbing back towards its 2021 high after a 30% rise since late October.
Burston noted three key developments in the market over 2024 that will draw investors back in, including major domestic institutions and cross border investors returning to acquiring assets after reassessing the market outlook.
“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,” said Burston.
“This is not to say that it will all be smooth sailing. The adjustment of formal valuations has still not entirely played out and will remain a brake on activity for the time being.”
Fully getting inflation back under control could be challenging despite a more favourable outlook and this in turn could discourage the RBA from changing the tactics of rate hikes utilised over the last two years.
Though the RBA changed its guidance in its March statement towards a more balanced outlook, with forward rate currently suggesting the cash rate will drop back down by around 50 basis points by the end of 2025.
“But as time goes on, it will become apparent that the risks are two-way. Buyers waiting for the full suite of economic and pricing indicators to switch from red to green may end up waiting too long,” added Burston.
“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.”
