As we move into the second half of 2024, the tide seems to be turning for Australia’s Capital Markets, with indications we are moving through the bottom of the cycle as activity gains momentum following several years of subdued activity.

Economic uncertainty has been the major challenge since the middle of 2022, as inflation rose, and with it, the cost of funding, amidst a challenging backdrop globally.

Since then, property investment has been on hold to a large degree, with investors waiting to see the extent to which asset values would adjust, as well as how long inflation would persist and how high interest rates would rise.

However, the cash rate has now remained stable since last November, with many expecting the next move by the RBA will be a rate cut, and in 18 months’ time rates are more likely to be lower than at the same or a higher level.

In the investment market, we are now seeing improving sentiment with a greater alignment of buyer and seller pricing expectations and capital values starting to stabilise. Prime yields have largely stabilised across all sectors, including in offices where the uncertainty and lack of liquidity has been most acute.

There have been a greater number of transactions in recent months, boosting volumes for Q2 and establishing a new baseline for pricing, which will likely lead to further activity, marking a turnaround for the market.

Investment across the office, retail and industrial markets totalled $6.2 billion in the second quarter, which was the highest quarterly total since Q4 2022 and up by 53% year-on-year.

Some of the most notable recent transactions include the sale of a 66% stake in a planned $2 billion tower at 55 Pitt Street in Sydney to Japan’s Mitsui Fudosan, and the settlement of Quintessential’s $250 million acquisition of 240 Queen Street in Brisbane from Brookfield.

With more major listings coming to the market, we believe it will be a strong finish to 2024.

Offshore investors are leading the activity rebound in Australia’s Capital Markets this year, and this is set to continue, with Australia predicted to be the number one destination for cross-border capital in Asia Pacific in 2024, according to Knight Frank’s latest APAC Horizon report.

Australia is expected to attract 36% of total cross-border flows in the APAC region in 2024, ahead of Japan (23%) and Singapore (11%). The continued focus on Australia reflects the perception that our market is more stable compared to other global markets with greater certainty and transparency, strong regulatory frameworks and freehold ownership. 

As the market shifts firstly to recovery and then on to the next growth cycle, there are many opportunities for both offshore and domestic investors across the sectors.

In the institutional office market, the capital value correction seen over the past two years is expected to be complete by the end of the first quarter of next year. In this sector prime high-quality leading ESG-credentialed assets are in demand, with the premium Sydney CBD market and Brisbane undoubtedly the most desired among institutional buyers. 

The retail sector has proven to be one of the strongest performing this year, with growing buyer demand, including amongst investors who have previously preferred to invest in other sectors.

We believe this demand will be sustained into 2025 as some of the pressures on household incomes start to ease, driving a pick-up in retail sales.

Moving forward, rapid population growth, coupled with a lack of new retail supply, will underpin retail performance, and this is largely where investor confidence in the sector is coming from. In the retail sector, low-risk assets in strong population hubs are proving to be the most sought after.

Meanwhile, there continues to be growing interest in living sectors, with activity currently concentrated in co-living and student accommodation. Build-to-rent is expected to be a stronger focus from 2025 as the cost of debt and construction costs stabilise.

The outlook for living sectors is positive as investors seek greater exposure to alternative sectors and the relative stability of residential assets in particular, as evidenced by high demand and growing rents.

The focus on living sectors also reflects broad community recognition of the structural demand/supply imbalance in Australia’s residential market, and of the role that living sectors could potentially play in addressing this by delivering more supply to the rental market.

Healthcare real estate and the emergent Life Sciences subsector has also generated substantial investor interest in recent years.

Factors driving this include the structural undersupply of acute healthcare facilities, the post-COVID realisation of a need for greater onshoring of research, development and manufacturing of medicines, vaccines, and medical supplies, and the strength of Australia’s innovation sector.

The sector also offers appealing lease terms, defensive attributes, and a favourable risk-adjusted return profile, providing a hedge against the challenges posed by recent uncertain market conditions.

Despite the backdrop of greater investor interest, the sector is still in its nascency in Australia compared to other countries including the UK, USA and Asia. There is a substantial opportunity for Australia to learn from these more mature markets to advance the sector domestically over the next five to 10 years.  

No matter what sector they’re looking at, property investors will be assessing future growth potential, and determining how to drive performance through income growth in particular. 

With macroeconomic headwinds gradually clearing, the fundamentals required for a return to growth in 2025 and beyond are now in place and we anticipate increasing investor demand across multiple sectors.

For more insights into Australia’s Capital Markets, download Knight Frank’s Capital Exclusive report: Capital Exclusive 2024 (knightfrank.com.au)

Links to Knight Frank National Capital Markets insights below:

Sydney a focus for Asian investors, who are returning to the market - By Knight Frank Partner, Head of Asian Markets Australia, Dominic Ong

The capital value correction is close to being complete, with activity now picking up - By Knight Frank Partner, National Head of Institutional Sales and Capital Advisory Ben Schubert

What are the most sought-after assets in Living Sectors in 2024? - By Knight Frank Partner, Head of Alternatives, Tim Holtsbaum

Investment activity in Australia’s capital markets is gaining momentum - By Justin Bond, Knight Frank National Head of Capital Markets

Shifting gear to income growth as property moves past peak uncertainty - By Knight Frank Chief Economist Ben Burston