Katy Dean, National Head of Research, Savills Australia
According to the 2023 Spotlight research study from leading firm Savills Australia, commercial property investment is expected to rebound in 2023 as the interest rate environment becomes clearer, perhaps constraining further outward yield movement.
Demand for datacenters is expected to expand in 2023, driven by an increase in the taste for and need for secure data storage and communication.
With a greater emphasis on governance, risk, and business continuity, more enterprises will utilise risk-mitigation methods, driving rising office utilisation rates in particular locations as well as demand for colocation or tiny data centres.
The 2023 Spotlight predicts that industrial and hotel asset types will remain desirable and competitive, with pub sales remaining strong. Student accommodation is also expected to increase when overseas students return to Australia, and Savills anticipates additional expansion in our burgeoning built-to-rent (BTR) sector.
According to Savills, the office sector is projected to revive in 2023, with more inquiries fueling pent-up demand. As the relevance of ESG grows, astute landlords will continue to improve the environmental credentials and performance of commercial office assets.
According to Savills, transactional activity has been limited at the close of 2022 with greater uncertainty around the economic outlook causing a widening in the Bid-Ask spread between purchaser and vendor.
“Some investors will continue to wait for the impact of higher interest rates to wash through valuations, but low leverage among major investors means higher interest rates pose limited systemic risks to the commercial property sector,” said Katy Dean, National Head of Research, Savills Australia.
Falling bond yields in 2023 will ease the pressure on property yields with the potential to limit further widening. However, Savills cautions that movements in yields could diverge significantly by individual asset depending on sector, quality, location, and lease length. Declining market interest rates could also help to facilitate a rebound in investment through reduced funding costs, and lower future returns on alternative fixed income investments.
2023 – Savills’ Trends to Watch
Data Centre demand to intensify.
Competing demand from data centres for sites in some markets could begin to price out traditional users. Savills predicts the increase in cyber-crime coupled with growing appetite for data storage, cloud computing and connectivity, will further drive demand in 2023 resulting in a greater reliance on data centres, including traditional offsite servers and micro-data centres.
Student Accommodation back on the investor wish list.
Investor interest in student accommodation is set to rise in 2023, driven by the recovery of international student enrolments, strong occupancy, and outperformance in rental growth during 2022. As international student numbers continue to rebound and supply remains constrained, Savills forecasts strong demand for investment into purpose-built student accommodation.
Build-to-rent sector to grown in 2023.
Australia’s BTR sector will continue to grow, with the yield stability of the sector reinforcing its long-term income stream capabilities. Residential rents have quickly recovered post COVID-19 lockdowns and declining availability of rental product will fuel future demand. With projections for the formation of smaller households to continue combined with increasing immigration, Savills says 2023 is set to see the trend for record low vacancy rates to remain.
Pent-up demand will boost pub sales in 2023.
Pubs have experienced record investment sales activity since the initial COVID-19 lockdown period in 2020. Renewed investor demand will see pub assets remaining sought after in 2023 – particularly renovated pubs with sustainable and consistent earnings. However, Savills flags that increased legislative pressure on gaming could cause a recalibration of expected yields and sale prices.
Hotel investment activity to remain buoyant.
The recovery in hotel trading fundamentals has been strong, especially in Brisbane and Adelaide, easing any potential debt serviceability issues. Record ADR levels are being achieved, with operators using the pandemic period as an opportunity to reset rates.
Room rates may level out or drop in 2023 but Savills expects occupancy to continue to trend upwards in compensation. Long-term rentals are less volatile and with state governments introducing new limits on the number of days in which hosts can rent out their properties, along with registration requirements, there is upside for the hotel economy, as well as the residential sector.
Industrial and logistics – rents tipped to rise.
Competitive tension will remain for industrial stock with vacancy to remain low. This will continue to push industrial rents in both prime and secondary markets in the short term. However, industrial land prices are increasing, and with materials and labour in short supply combined with escalating building costs – the development cycle will be extended. Vacancy averages less than 1.0% in many markets and this is keeping intense pressure on new development take-up rates, suggesting substantial rental growth will continue in 2023.
Supply chain disruption to ease.
While the effect of e-commerce growth is still playing out, there has been evidence of some improvements in the supply chain, including declining shipping costs, greater container availability and easing of port congestion. Price drops of some commodities suggest that shortages are easing, while an increase in industrial production suggests manufacturers are better positioned to meet demand levels. Warehouse industrial demand may slow as inventories are managed down but record low vacancy will remain with available stock in short supply.
Intensified demand for ‘green’, driven by growing ESG commitments and competition for talent.
ESG will also be an important focus for asset managers, particularly the use of big data and analytics to realise the green premium.
Occupiers demanding green credentials.
ESG initiatives will become a more critical part of investment strategies across all asset classes, with landlords adopting green building certifications, energy efficiency upgrades, and green investment. The green agenda remains a growing priority for corporate occupiers seeking to meet their own net zero commitments.
Greater demand for long-term secure income stream assets.
Global Assets Under Management (AUM) are over USD$123 trillion (Deloitte 2021) almost double the 2016 volume, reflecting the increasing allocation to property from institutional, private equity, and sovereign wealth funds. Savills forecasts this could lead to greater demand in 2023 for long-term secure income stream assets such as industrial/logistics, BTR and core office.
Multi-speed office leasing market.
Occupier requirements for Prime Grade office, and low supply in core locations will sustain current demand but there may be a softening of incentives in peripheral locations to attract and retain tenants. Savills expects to see increased flight to quality across asset type (core), higher building quality (Premium, high quality A grade, highly green-rated) as well as flight to location with well-located, notably CBD or gateway locations front of mind for occupiers in 2023.
Investors more selective – flight to quality will continue.
The market may see a greater divergence between asset classes, with increased demand for top locations, top quality assets in office, industrial and retail.