Private Capital Commercial Property Investment 2023

It is predicted that Australia will offer great commercial real estate investment opportunities for family offices and private capital investors alike over the next few years.

Some of Australia’s leading property bankers predict that private capital will call the shots in the commercial property market this year.[1]

Private capital is anticipated to be ”the most dominant player in real estate activity in Australia over the next few years,” said Tim Church, Morgan Stanley’s chairman and co-head of investment banking in Australia at a virtual roundtable with The Australian Financial Review.[1]

Factors affecting real estate activity in Australia include:

  1. Increasing cost of debt
    The Reserve Bank of Australia’s latest statement on monetary policy in November 2022 tips inflation to fall from a peak of 8% at the end of 2022 to about 3.25% by the end of 2024.[2] The next statement of monetary policy is due 10 February 2023.

    The RBA started increasing the cash rate from the historic low of 0.1 per cent, currently resting at 3.1 per cent.

According to Mr Church, you can expect to see real estate asset values fall further in 2023 as the cash rate peaks in early 2023. Morgan Stanley estimate this will occur in March 2023 following two further cash rate increases by the RBA in February and March each of 25bps for a peak cash rate of 3.60 per cent.[1]

  1. Increasing cost of Capital
    The Australian Financial Review reports that “for borrowers, the increased cost of capital is reflected in higher interest rates, lower loan-to-valuation ratios, increased scrutiny of loan serviceability, and more reticence from financiers.”[1]

    According to Mr Schauer, interest coverage ratio’s may get pressured given the sheer movement in rates, therefore strong capital and liquidity buffers are crucial.[1]

    The abundance of capital noted by Mr Church enables private capital to participate in large transactions where competitors may not be able to provide enough capital.

  2. Bond yields
    Mr Church said that consideration also needs to be given to what the risk-free rate (i.e. the 10-year government bond rate) has done and where it is going. The 10-year bond rate moved from a low of 0.676 per cent in March 2020 to a peak of 4.25 per cent in June, 2022.[1] However, Savills reports that bond yields are set to fall in 2023 as global growth slows, inflation eases and investors anticipate eventual cuts in the central bank policy rates. This will ease the pressure on property yields with the potential to limit further widening.[3]


Commercial Property Market in Australia

“We expect the direct market to adjust down by circa 10 per cent to 15 per cent with the office sector being at the wider end and industrial/logistics at the narrower end of adjustments due to the significant positive rental growth negating (or severely limiting) any cap rate expansion that may occur” Morgan Stanley’s Mr Church said.[4]

According to Mr Schauer “for groups with the right combination of patience and conviction, however, this period could throw up some great opportunities in both listed and direct markets.”[1]

Savills reported that the pandemic encouraged employers to lease quality office space to attract and retain talent. Therefore demand for premium office space significantly outperformed A grade and secondary stock in 2022. [5]

According to the Australian Financial Review “the big threat to the commercial property market is that the economy will slow to a degree that dampens the demand for space and cuts values”. [6]

However, “market dislocation always throws up investment opportunities” says Mr Church. He is of the view that, whilst sentiment is weak towards office due to the work from home (WFH) phenomenon, he believes in normalisation and expects CBD office markets to continue to see increased occupants back to the office from workers who have yet to return. He is of the view that the office sector may just provide an opportunity to buy some quality assets at discounted prices when the news (i.e. sentiment) is at its worst.[4]

According to Savills, the deterioration in the global economic outlook, high inflation and rising interest rates combined with slow-down in economic growth and a deterioration in labour market conditions in Australia, will reinforce the appeal of well-located core assets, as well as premium and high-quality A grade buildings and with highly rated green credentials.[5]

Colliers Australia chief executive, Malcolm Tyson, expects the two-tiered nature of markets that emerged last year to be accentuated in 2023, and favour premium and A-grade office assets, strong performing retail in prime catchment areas and industrial properties with shorter leases.[4]

Mr Tyson  expects office values to fall throughout 2023; by 5 per cent for premium grade towers, by 12 per cent for A-grade but by up to 20 per cent for B-grade. “The value of office space has evolved post-pandemic to emphasise employee experience over headcount to space ratios,” he says. “It’s likely that capital values for premium and A-grade stock will exceed pre-pandemic numbers across 2024 and 2025.”[4]

Savills reports that the Australian economy is expected to fare better than most  other western economies and, according to Capital Economics, remain in expansionary territory. With a relatively strong growth outlook and competitive exchange rate, Australia has an enduring appeal as an investment destination.[5]

 [1] Australian Financial Review, 13 January 2023 – “How top bankers see property prospects for 2023”

[2] Reserve Bank of Australia – Economic Outlook | Statement on Monetary Policy – November 2022 | RBA

[3] Savills: Australian Commercial Real Estate Markets Spotlight on 2023 (Q4 2022)

[4] Australian Financial Review, 13 January 2023 – “Private capital to outgun battered REITs this year”

[5] Savills Research – Australian Offices 2H/2022 – 22 December 2022

[6] Australian Financial Review, 18 January 2023 – “Invest when the news is at its worst”: Commercial property in 2023