We expect a recovery in Australia’s commercial property sector 2024, driven by an easing of the restrictive economic conditions we have been up against this year.

The high interest rate climate has hindered investment activity with transactional volume down by around 60% this year.

With rates expected to peak and then begin to decline in 2024, and as prices continue to adjust, transactional activity is set to regain momentum with pent-up capital unleashed into the market next year.

Lower grade assets to be offloaded

The trend for institutional players to dispose of lower grade assets to reweight portfolios and fund more high-growth, low-risk projects is something we can expect to see more of.

This will occur as demand grows for capital for active asset management strategies where returns can be manufactured in an otherwise low return environment.

The Australian Hotel sector is one to watch in 2024. We expect national occupancy recovery to continue fuelling the resurgence of the market. ADR (average daily rate) is now well above pre-covid levels and up by 32% on average.

Top three sectors

Despite a level of economic uncertainty, Australia’s population growth is robust and remains a key driver of the market. The Top 3 sectors in 2024 for investors will be industrial, hotels and alternatives including student accommodation, multi-family residential/BTR and data centres.

The Australian Hotel sector is one to watch in 2024.

We expect national occupancy recovery to continue fuelling the resurgence of the market. ADR (average daily rate) is now well above pre-covid levels and up by 32% on average.

Meanwhile, RevPAR (revenue per available room) levels have stabilised across all cities – with Brisbane, Gold Coast and Darwin reflecting the highest RevPAR growth.

Three dominant strategies

We expect investors will largely be driven by three strategies in 2024 – value-add and repositioning strategies, core and core plus income driven approaches and also opportunistic ways to unlock value.

We have already seen strong appetite for high-return strategies, with 25% of institutional investors indicating they expect to invest in both opportunistic and value-add strategies interviewed in the Hodes Weill & Associates – 2023 Institutional Real Estate Allocations Monitor, compared to 10% planning to invest in core and core plus.

Australia remains a favoured investment location for offshore investors, given our relative economic resilience.

Sydney was recently ranked as investors second choice for investment globally.

We have spoken to offshore investors who indicate greater comfort around deployment in 2024 in view of a potential peak interest rate environment and strengthening macro fundamentals.

Other key trends to watch in 2024

Savills Australia’s Spotlight on 2024 Report expects the following trends to define 2024.

Continued focus on industrial (and data centres, cold storage). Population growth and ongoing expansion of e-commerce (and technology) to sustain the demand for industrial floor space.

Investors to back student accommodation. Another attractive alternative asset class for investors is student accommodation, which is expected to receive ongoing investor interest in 2024, driven by a rebound in international student arrivals, rising occupancy, and strong rental growth.

Investor interest in hotels but buyers more cautious. Australia’s migration boost will also contribute to the underlying domestic demand for tourism and hotels, with CBD and gateway locations amongst the most attractive. This will drive investment demand, but buyers will be more selective as hotel occupancy rates normalise.

Residential rental growth to maintain momentum. Capital will chase scale in residential and build-to-rent (BTR), as the ongoing low vacancy of housing stock across the country continues to drive rental growth. Rental affordability is expected to remain a challenge throughout 2024.

Prime will be fine. Prime offices to remain a resilient asset class, with the economic outlook reinforcing the ‘flight to quality’ trend. As the multi-speed leasing market continues, secondary offices are tipped to be at greater risk of negative rental growth. Hybrid office working will increase the appeal of core locations and may see the rationalisation of larger mandates, particularly outside of CBDs.

Capital values will fall further but some sectors will be resilient. Expect further contraction in capital values but this will vary by sector, with capital values holding up better in sectors with stronger rental growth prospects such as beds (accommodation) and sheds (industrial).