There are signs the institutional office market has reached – or is close to – the bottom of the cycle. The capital value correction that has been apparent for the past two years, and is expected to be complete by the end of Q1 of next year – with valuations and 'market value' likely to reach parity at this time.

The peak to trough value correction will be in the order of 25% to 30% nationally once the cycle is complete, with Sydney CBD values leading the way. 

Recent transactions, including the sale of 55 Pitt Street, Sydney and 240 Queen Street, Brisbane are evidence that conviction in capital values is being restored amongst investors.

Until recent months there had been a dearth of transactions, which meant there was not enough evidence of where capital values were sitting and hence we saw a prolonged correction. But with greater transaction activity, the tide looks to be turning. 

Recent sales have served to reset values to a degree, and have fostered greater confidence amongst institutional investors. As such, we expect to see greater activity and increased transactions throughout the remainder of 2024.

Sellers are becoming more active, and while there is still some reluctance, Q3 and Q4 are likely to be busy in terms of the amount of assets hitting the market, with institutions looking to sell down primarily to reduce gearing.

Some investors are closely monitoring potential rate cuts before actively engaging in sales processes. There is still a belief that there may be further rises, however we are likely either at the top of the interest rate cycle or very close.

Which assets are the most sought after, and where?

Currently, a significant trend in the institutional market is the appropriate pricing of risk.

Prime high-quality leading ESG-credentialed assets will be – and are - in demand and will lead the way with yield compression once decompression is complete. In contrast, poorly located older assets without appropriate ESG credentials will suffer the largest value reduction.

Landlords with assets in the latter category are advised to invest in ESG initiatives. Brown to green investments are still quite desired, however they need to be purchased at the right price for the refurbishment to be feasible. 

Assets in Sydney – particularly the premium CBD market - and Brisbane are undoubtedly the most desired amongst institutional buyers, with these cities leading the way with strong leasing results.

Capital raising is underway

There are significant capital raising processes currently underway within the Australian market. Investment managers in Australia are looking further afield to source capital as it has been particularly hard to do so for the last two to three years. They are seeking help from advisors to source this capital to execute their investment strategies.

For capital looking to invest, the living and industrial and logistics sectors are in most demand. Within the Living sector, the subsets of co-living and student accommodation are of particular interest, in addition to land lease communities. All of these are seen as a key way to solve the Australian housing shortage, and can produce solid returns for investors.

Investors are starting to consider counter cyclical office strategies with those involving assets in Sydney and Brisbane of most interest. Some office assets will come back into vogue with location, quality and ESG the three key factors in whether there will be investor demand for the product or not.

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