By Ben Martin-Henry, Head of Real Assets Research, Pacific, MSCI
The Australian commercial real estate market experienced significant value adjustments in Q2 2024, with no sector remaining unscathed. The Property Council of Australia/MSCI Australia Annual Property Index posted an annual total return of -3.7% for the 2023/24 financial year. This downturn was primarily driven by a sharp decline in capital growth, which registered at -8.5% – the worst annual result since 2009. Concerningly, whilst most global markets are entering a recovery phase, the Australian slowdown appears to be intensifying.
The office sector remains the primary contributor to this downturn, with losses now surpassing those seen during the Global Financial Crisis (GFC). The broader office sector has experienced a cumulative loss of 22% since its previous peak, compared to the 19% peak-to-trough losses recorded during the GFC. In the latest results, offices reported a total return of -9.3% for the financial year, driven by capital losses of 13.6%.
The office sector’s slowdown has affected all markets and grades. While premium CBD offices have fared better than lower-grade counterparts, they too have experienced severe write-downs, exceeding those seen during the GFC, with values down 16% from previous peaks after recording capital growth of -11.6% for the last financial year. Both Sydney and Melbourne have now seen 20.5% and 21.2% of their CBD office values wiped out since the slowdown began, a decline more severe than during the GFC, with capital growth of -14.2% and -15.4% respectively in the latest results.
On a more positive note, the retail sector recorded a total return of 2%, thanks to an income return of 6%, which helped offset the negative capital growth of -3.8%. While declining capital values are still a concern, the pace of decline is slowing, and strong rental growth is beginning to turn the tide. Grocery-anchored shopping centers, sub-regionals, and neighborhoods are leading this turnaround, with capital growth of -2.4% and -3.1% respectively – significantly improved from the -4.7% and -6.9% recorded in December.
For several years, the industrial sector has been the best-performing asset class in Australia, and indeed globally. However, during the 2023/24 financial year in Australia, the retail sector overtook industrial as the top performer, as industrial assets posted a total return of just 0.1%, a stark contrast to the 23% recorded two years ago. The slowdown in the industrial sector was driven by a decline in values, with capital growth registering at -4%, a significant drop from two years ago when industrial values increased by 18%.
Rolling Annual Returns
Capital Growth Changes
