2024 will likely mark a turning point for commercial property markets in Australia and other developed countries with 2023 expected to be the low point for total returns, according to Knight Frank’s Will Beardmore-Gray.

Beardmore-Gray, who is Knight Frank’s Senior Partner and Group Chair, said Australia was not dissimilar to other global developed economies.  

“We have been seeing rising inflation and interest rates, which has been impacting capital values globally for commercial property,” he said.  

“With rates likely to rise a little further in Australia, pressures on real estate capital values are likely to remain this year, but a return to stronger economic growth from 2024, combined with declining interest rates, is expected to lead to a notable improvement.  

“The themes we are seeing around the world are fully reflected in Australia, with plenty of cause for optimism in commercial property markets next year and beyond.”  

Will Beardmore-Gray, Senior Partner and Group Chair at Knight Frank.

Most forecasts in Australia have the cash rate, which stands at 4.1%, experiencing one or two more increases before being cut in 2024 as inflation eases.  

Knight Frank research shows activity in capital markets has slowed since 2021 and there continues to be insufficient transactional evidence to confirm the exact movement in property values.  

While formal valuations are only now starting to shift, it is estimated that prime office and industrial yields have moved out by around 75 to 100 basis points.

Beardmore-Gray said there was strong underlying demand for Australian assets from major institutional and private investors, but many were prepared to wait for greater clarity on the outlook.  

“We expect deal momentum to gradually pick up once the Federal Reserve in the United States and RBA signal that they have reached the peak of the rate hike cycle as this will help instil greater confidence in the outlook and shift the focus to potential rate cuts in 2024 to 2025.  

“Japanese investors are quite active at the moment and are a key source of demand for larger deals, given their relatively low cost of debt.”  

Beardmore-Gray said he believed there were substantial opportunities for well-capitalised commercial real estate developers to secure the best sites for the delivery of new and upgraded space over the year ahead.  

“There is a lack of high-quality best-in-class office and commercial space and a need for greener and more environmentally friendly buildings in most major markets to meet more exacting occupier requirements and tighter environmental regulation.  

“We also believe there will be strong opportunities in the best located logistics properties, living sector accommodation and some specialist sectors, including healthcare and data centres, which are likely to receive a boost from AI data requirements.”