Signs of green shoots in Australian commercial real estate

Australian commercial real estate markets are showing signs of positive change, according to Benjamin Martin-Henry, Head of Private Asset Research Pacific at MSCI. 

Martin-Henry was participating in a wide-ranging property discussion with Gregory Preston, Chairman & Managing Director at valuations firm, Preston Rowe Paterson, as part of the PFA Podcast series.

“Obviously there’s a few global issues going around which will impact Australian real estate. But I think by and large we’re coming to the bottom of this current cycle”, Martin-Henry said.

He pointed out the rise in transaction volumes for last year, which were not just inflated by the  deal for data centre platform, Airtrunk, which involved around $10 billion in assets.

“Even if you exclude that [Airtrunk] we still had around a 15% increase in transaction volumes compared to 2023 – albeit 2023 was a low year, but this is how cycles work. You get a low year and then you have a slow recovery. I certainly think we are starting to see that on the transaction side. 

“The reason we’re seeing that is values have adjusted quite significantly, particularly in that office sector, so it has created more relative value for investors and given more buying opportunities.”

Martin-Henry said the latest index result for direct property sectors showed some good news and some bad news. “On an annual basis we had a flat return, it was -0.5% for 2024, and that was driven mainly by capital growth, which was still negative. 

“The main protagonist of course was the office sector, which saw a negative return of -7% and capital growth was down around -11.5% for the year. But why I say there is some positivity here, if we look at the quarterly numbers it tells a very different story. 

“In June of 2024 capital growth was -3.2% on the overall index, but in December last year it was flat, at -0.3%, so pretty much flat. There was even some positivity for the office sector because June capital growth was -6% and December was -1.5%. 

“So we are starting to get to the bottom of this cycle and I think that’s a big reason why we saw an increase in transaction volumes.”

The Property Investment Factsheet for December 2024, available to PFA members, also mentioned signs of green shoots regarding cap rate stabilisation across all property asset classes.

As to whether we are at the start of the next cycle, Martin-Henry suggests it’s too early to call for the entire market, as certain assets and sectors recover at different speeds. “It’s a very different cycle to the GFC, where everything went down and came back up again, almost like a V-shaped recovery. 

“It’s going to be a much slower return to parity for each sector, but I think this time around it’s going to be very hard to look at averages – everything is so asset specific and location specific, and market specific. So I think it’s possibly too early to call the entire market is into its next cycle.” 

The potential for interest rate cuts will be influential, but at this stage Martin-Henry doesn’t see a link with interest rates and the property market recovery. “Property was already improving before the rate cut. The rate cut is just going to help that, because property was already bottoming out. 

“I find there’s a slight disconnect there, [to say] there’s a rate cut and property is improving. I think it’s the other way around – property is improving, and now there is a rate cut, which is only going to help improve the sector.”

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