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Rising interest rates, high construction costs, and continued levels of inflation are placing significant pressure on Australian property investors. In response, many are seeking safe-haven investments to protect themselves against the effects of the slowing economy, while preparing for a potential speed-up in 2024.
With the global demand for Australia’s goods and services lessening and the rising cost of living weakening the global economy, capital values in residential and commercial property markets are facing uncertainty. Transaction volumes across office, retail, and industrial sectors reached $35.9 billion towards the end of 2022, down 29 per cent from $50.5 billion in 2021 (CBRE, December 2022).
To soften the blow from these economic headwinds, property investors are pursuing long-weighted average lease expiries, purchasing alternative and emerging asset classes, and investing in commercial real estate debt.
Savvy investors will consider positioning their portfolios for the long term by seeking exposure to lower-risk sectors that benefit from long-term structural tailwinds.
For example, “bite-sized” assets such as service stations and convenience stores may feel a lesser impact from inflationary measures. With attractive, lengthy leases, quality tenants, and high-profile locations, this kind of alternative asset can provide a sense of security for investors during an economic downturn.
Industrial and logistics assets are also in high demand, supported by the shift towards e-commerce and the re-onshoring of manufacturing facilities post-COVID-19. A lack of prime real estate is placing upward pressure on logistics rents nationwide, with prime industrial face rent growth forecast to rise by 8 per cent in Melbourne, 10 per cent in Sydney, and 12 per cent in Brisbane this year (Knight Frank, 2023).
Whilst premium assets with stable tenants are safe bets in the near term, some investors are turning to more unconventional investments that are more likely to shelter them from fluctuations in capital values over the coming years.
Take the growing trend in investing in commercial real estate (CRE) debt, which has been spurred on by reduced bank lending to the commercial property sector in recent years. This type of debt is considered defensive and comes with several built-in protections. For example, CRE debt offers stable income returns through agreed interest payments that insulate the lender from volatility.
Investors can also utilise low loan-to-value ratios (LVRs) in their CRE debt investments, adding an extra layer of protection from property price fluctuations. Low LVR funds limit exposure to the value of the security, whilst still achieving attractive risk-adjusted returns.
Looking forward, central banks have started to ease interest rate increases, so it’s forecast that property markets may begin to normalise over the next 12 months. But in order for Australia’s property investors to weather the current economic slowdown, they would be wise to minimise the risk of corrections in equity prices, looking to these available safe havens.
Whether through purchasing emerging asset classes, or investing in CRE debt, there are smart investments that will help property investors hang tight for a better 2024.
Andrew Turner is the chief executive of Banner Asset Management
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