Commercial real estate sector primed for strong growth in 2024, experts predict
After a year of post-pandemic readjustment and recalibration, good times are just around the corner for the commercial real estate industry in Australia, one of the country’s leading investment bankers has forecast.
On Monday, Morgan Stanley Australia chair of investment banking Tim Church told the annual Australian Financial Review Property Summit – attended by most of the sector’s leaders – that the future looks extremely rosy.
“[This year] has been a planning exercise and a recalibration, and I think 2024 and 2025 are going to be the most productive years we’ve ever had,” he said.
The prediction came after Church said that “the slaying of the inflation dragon” was proving very painful for many Australians, but that the country’s economy remained resilient. Those difficult years, however, had served to hone the industry to make it sleeker, sharper and more ready to take advantage of opportunities.
“It’s fair to say that you don’t become a good sailor in smooth seas, and it’s pretty choppy at the moment,” he said
“We are ranked 55th in global population, but we have the fifth-largest pension fund market in the world for our super funds, with Australian superannuation assets projected to reach $10 trillion by 2040. That’s quite significant and a good reason to be optimistic and positive about the future.”
His optimism at day one of the two-day summit – which looks at all aspects of real estate and is the fifth to be held in Sydney – was echoed by a number of other speakers who addressed the packed conference room.
Charter Hall chief investment officer Sean McMahon said Australia was viewed as an extremely good prospect by overseas investors.
“We have about 100 major offshore investors in the group, and you get good insights from investors looking at Australia,” he said. “We have a triple-A credit rating, 29 years without a recession pre-pandemic, a comparatively good debt-to-GDP ratio, and a diversified economy with diversification continuing.
“But it’s our population growth that excites investors the most. We’ll have 10 per cent growth over the next five years – the highest in the developed world – which will create $20 billion of incremental demand. Then we have a chronic undersupply of residential, sheds and beds. We also have low volatility. So we’re in a pretty good position.”
Build-to-rent: an untapped opportunity
Office assets now appear to have picked up in popularity as more people return to the workplace, retail is repositioning itself into more of an entertainment space to attract more customers, and industrial is simply roaring ahead, driven by the boom in e-commerce and accompanying demand for warehousing.
Other comparatively new asset classes, like the build-to-rent (BTR) sector, also offer huge opportunities for the future, said the summit’s keynote speaker, Kathleen McCarthy, Blackstone’s global co-head of real estate, who appeared by video from the US.
“There’s a deep group of individual investors who provide accommodation for rent, but we see purpose-built rental accommodation going through a pioneering moment,” she said.
“In Australia, there’s a real shortage of housing, particularly rental housing, and we see the provision of purpose-built rental housing as an ongoing theme around the world.”
All tiers of government need to collaborate with private enterprise to maximise the potential size, and impact, of the BTR sector, with planning approval times slashed and design guidelines agreed upon, other speakers said.
Angela Buckley, the Mirvac Group’s fund manager – BTR sector lead, said: “There are so many benefits that can be delivered to consumers who are at the core of the model. But we need to get all tiers of government in line to do justice to the opportunities that exist.”
Expanding the sector would also be good for investors, agreed Michael Streicker, president of the Sentinel Real Estate Corporation who flew in from the US to attend the conference.
“Individual investors should not hold individual rental assets, which is a highly inefficient system,” he said. “Individual investors should be able to invest in BTR so they can have a stake in the housing market without the responsibility of being a landlord. That will be the evolution of BTR.”
Planning overhauls will rejuvenate cities
Lendlease global chief executive Tony Lombardo said he believed office assets were also performing well, with the flight to quality holding steady.
“With new offices, we’re still seeing that people are attracted to high-quality assets, so premium offices will hold their value and we’re seeing secondary office assets drop off,” he said. “It’s still early days, and we’re seeing a lot of repositioning of assets.”
To ease their refurbishment, or the conversion of B-grade stock into residential, Dexus chief executive Darren Steinberg called for councils to urgently review their planning regulations.
“Councils have to look at planning regulations to see what makes sense,” he said. “The City of Sydney has to look at allowing more residential development in the city to create more vibrancy and bring more life back into the CBD.”
Melbourne, Lombardo said, was well ahead of Sydney in that respect. But in a situation where we have half a million more people coming into the country, necessitating a huge increase in the housing supply, such changes are critical. “So if we want to turn our cities into 24-7 cities like New York, Singapore and Tokyo, we need to improve this,” he added.
Andrew McDonald, Cushman & Wakefield global president and chief operating officer, said another important component was getting people back to the office to focus on increasing productivity and creativity.
“We haven’t been as productive as we were pre-COVID,” he said. “People need to be together to work smarter and better.”
Retail moves into experiential spaces
As far as retail goes, Scentre Group chief executive Elliott Rusanow said shopping centres were undergoing huge changes in order to increase the number and duration of visits, and, thus, returns for the businesses.
“We aren’t in the shopping mall business; we’re in the time business,” he said. “We are in a transition of making it more attractive to spend time on our sites.”
The company’s Westfield Knox shopping centre in Melbourne’s outer-eastern suburbs, currently undergoing a $355 million upgrade, is a good example, with the redevelopment including a basketball court, a public library, an outdoor playground, a community space, co-working space, a food court and connectivity.
“The experiential element of what we are doing gives everyone a reason to spend more time at the shopping centre and visit it more often.”
Industrial assets are still storming ahead in value and in rents charged when they haven’t already been signed up to long leases. Those strong returns, particularly from warehouses, are likely to continue, especially considering the even higher rents being paid overseas and the continuing demand, said John McBain, joint chief executive of Centuria Capital.
“If you look at the underlying demand, with 40 per cent of it from e-commerce and logistics, then we don’t think the story of their success is even close to stopping,” he said.