As we near the end of 2024, Knight Frank has released its flagship outlook report for the year ahead, called Australian Horizon 2025, which features its 7 top predictions for the commercial property market in 2025. 

Knight Frank Chief Economist and report author Ben Burston said: “The Horizon report sets out  our views on Australian real estate for the year ahead, examining the macro context underpinning  investment performance, with sector specific insights across office, industrial, alternatives and retail markets that shed light on the path to performance in 2025 and beyond. 

“While we have made 7 key predictions for the market next year, our central thesis is that core assets  in the Australian market now represent good value for investors, with strong prospects for cyclical  recovery starting in 2025 and long-term growth,” he said. 

“Now is the time to buy, and this optimal window will extend into 2025 with capital values likely to start  rising in the second half of next year.” 

Prediction 1: A new cycle dawns: Australian property set to turn the corner to growth 

Well-located core assets have now largely repriced and are poised to start the recovery in 2025, with  pricing, if not yet formal valuations, now at a cyclical low. 

“Investors acquiring assets now, after values have adjusted down but not yet commenced the  recovery will be well-placed to see strong returns in years to come,” said Mr Burston. 

“Core industrial and CBD office assets in Sydney will lead the way before the recovery extends to other cities.” 

Prediction 2: The level of neutral interest rates will underpin the strength of the cyclical  recovery

The strength of the cyclical market recovery will be guided by the extent of interest rate cuts once the  RBA shifts stance to start easing policy.  

“Investors will need to be tuned into the evolving debate on neutral rates and ensure their strategy is resilient to multiple scenarios for the level of long-term interest rates,” said Mr Burston. 

Prediction 3: Ready to strike: investors poised to execute revised strategies after lengthy hiatus  

After nearly three years with markets in a state of flux, many investors have reset their expectations  and are ready to home in on their preferred investment opportunities.  

“This will drive broader interest and higher liquidity across all asset classes in 2025,” said Mr Burston. 

“Many investors are now attracted by lower pricing in the office market, while other groups are more  focussed on living sectors and have taken time over the past two years to better understand the  feasibility constraints and are now better placed to execute on new developments. 

“Meanwhile, retail markets are set to benefit from significantly higher demand as investors re-engage  with the sector.” 

Prediction 4: High office vacancy rates obscure the looming lack of new supply  

High office vacancy rates in most markets and elevated incentives continue to point to the need for  caution in bringing forward new office developments, and at the aggregate level, many markets  appear oversupplied. 

“This, however, obscures the prospect of a tightening of supply at the top end of the market, owing to  a slowdown in new development while many tenants still need to adapt and upgrade their workplace  experience,” said Mr Burston. 

“The slowdown in commencements is now clearly impacting the pipeline, particularly in Sydney and  Brisbane, which will act to drive up face rents on new developments and aid the Sydney market  recovery.” 

Prediction 5: Higher supply to lead to a divergence in industrial rent performance in 2025 

Rising availability of industrial product is expected to continue into 2025, with high levels of new supply still flowing into the market.  

“New supply and exposure to sublease vacancy varies across the country and in 2025, we expect  more divergence in rental performance between the markets more impacted by higher supply levels,  such as Sydney’s Outer West and West Melbourne, and less impacted markets such as South Sydney  and East Melbourne,” said Mr Burston. 

Prediction 6: Retail is back – strongest investor demand since 2015

Macro headwinds to the retail sector are now dissipating and shopping centre performance is  benefitting from extended efforts to enhance visitation and customer experience.  

“Improving asset performance has been noticed by a broader range of investors and the outlook for  income growth is increasingly supportive off the back of rising real incomes and sustained population  growth,” said Mr Burston. 

“As a result, we think that investor demand for retail assets in 2025 will be the strongest for at least a decade. 

“With investor sentiment having shifted, a lack of available stock relative to the level of demand will tilt  the balance toward a recovery in capital values.” 

Prediction 7: Addressing the mid-market the key to widening awareness of the benefits of BTR 

2025 will be a critical year for the Build-to-Rent (BTR) sector, with potential for meaningful policy  changes – including to the withholding tax rate applying under the Managed Investment Trust (MIT) regime – that would trigger the accelerated roll-out of new schemes.  

The perception of where BTR sits within the overall housing mix is linked to these debates and  potentially other policy changes to support development, according to Mr Burston. 

“The perceived success of schemes targeting the middle of the rental range will be important in  widening awareness and understanding of BTR and winning broad community support for policy  changes,” he said. 

“On the other hand, if BTR is perceived to be exclusively a premium product, this reduces the  likelihood that policymakers will adjust planning and taxation frameworks to encourage a faster roll out.” 

To download Knight Frank’s Australian Horizon 2025 report please visit: Horizon Report 2025 | Knight  Frank

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