Rising rates and falling values: What does FY2024 have in store for Australia’s commercial property sector?

The past financial year has been an interesting one for the property sector here in Australia and worldwide. Central banks in major economies, including the Reserve Bank of Australia, have been pulling hard on the interest rate lever in a bid to put a lid on rapidly rising inflation. We’ve seen multiple increases to the cash rate and it’s likely there’ll be more to come over the next few months.

Has that influenced commercial property prices? Undoubtedly. Some have seen portfolios devalued but quantifying the impact is challenging, given not a lot has changed hands in recent times (low transaction volumes mean fewer data points to gauge how the market is travelling) but with asset buyers looking to offset the cost of debt, lower values are as inevitable as death and taxes. However, those with capital could well pick up undervalued assets in this environment.

So, what does FY2024 hold in store for commercial real estate owners and investors at a time when for analysts on some teams, we are seeing fewer analysts doing the same amount of work. While this could lead to increased workloads and potential missed opportunities in transaction deals, it’s actually an optimal time to review new technologies which could help improve standardisation and process efficiency.

Here are some developments we could see unfold in FY24.

Consolidation cranking up

We’ve already seen a lot of consolidation of late. AMP Capital has finalised the divestment of its property and infrastructure funds to Dexus. Other notable deals in FY2023 included Growthpoint Australia’s acquisition of the Fortius Funds Management platform.

If interest rates continue to rise, fund managers with highly geared portfolios must restructure. For those in the position to do so, divesting an entire business or platform may be more attractive than a series of one-off divestitures. I expect FY2024 to herald other consolidation moves across the commercial real estate landscape.

Distressed asset sales

Given the macroeconomic forces, it’s a fair bet that FY2024 will also bring its fair share of distressed asset sales. Although it’s yet to play out in the data, the stress and pressure are already building for fund managers wondering how they will deal with those redemption queues. And for those who’ve deferred asset impairments, the inevitable revaluation of assets is likely to be a sobering exercise.

Overseas interest intensifying

That said, Australia continues to hold considerable appeal for overseas groups looking for both indirect and direct exposure to commercial property. There may well be more of the latter in FY2024, as international super funds look to right-size their investment ratios Down Under, some even opting to install their acquisition teams in our major capital cities.

Addressing the ‘empty office’ issue

Much has been written about the remote working phenomenon sparked by COVID-19. Three and a half years on and a look around the CBDs and near-city precincts of major cities in Australia and globally will confirm that what many commercial property investors feared would transpire has come to pass. A sizeable volume of office space remains vacant or below capacity occupation, particularly in periphery CBD locations.

It’s difficult to see the new status quo of hybrid work preferences changing significantly despite campaigns to get workers back to base, from senior leaders like CBA’s Matt Comyn. The chief executive officer of the country’s biggest bank hit the headlines in May when he announced employees would be required to spend at least 50 per cent of their time in the office. Australians’ collective enthusiasm for at least some home-based working shows no sign of diminishing and employers with an eye to staff retention are likely to be loath to push their teams too far, too fast. Building owners may be in a holding pattern, but this position is unsustainable given the size and scale of the underutilised assets at stake. The new financial year may usher in some repurposing proposals and plans with high-end residential, student accommodation, childcare centres, and retailer fulfillment warehouses moving into what was once office space.

Industrial powerhouses

While offices and retail assets may be in flux, industrial real estate has enjoyed a stellar run in recent years. Investors continue seeing potential in the commercial property that underpins the thriving online economy such as logistics sites and fulfillment centres.

In FY24 expect an ongoing healthy appetite for quality assets and property values that reflect that demand.

Scott Willson is the CEO of Forbury