Commercial property rebound looks ‘better than expected’ for investors

With rising interest rates hurting sentiment across the commercial property sector, 2024 is now shaping up to be “better than expected”, according to a new report.

Knight Frank’s Horizon 2024 report update found that improved economic conditions are boosting sentiment, buyer and seller expectations are narrowing and the outlook for returns is increasing compared to other asset classes.

Knight Frank Chief Economist, Ben Burston, said the opportunity to buy commercial property is about to open. “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 fact that the Reserve Bank of Australia might cut rates is helping the sector. “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 conditions are now starting to entice investors back into the market.

“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 is still holding the market back. “But as time goes on, it will become apparent that the risks are two-way,” he said.

He mentioned that buyers shouldn’t wait too long to get active, stating “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.”

*This information is general in nature and does not take into consideration your individual circumstances. Please contact us for further information.