By Ben Martin-Henry, Head of Private Assets Research, Pacific | MSCI
After five consecutive quarters of capital value declines, the Australian commercial property market is showing early signs of bottoming out, according to The Property Council of Australia/MSCI Annual Property Index with green shoots of capital stabilisation emerging across most sectors in Q1 2025.
Total returns have improved from a low of -2.0 per cent in Q2 2024 to +1.4 per cent in Q1 2025 at the all-property level, driven by a steady income return of 1.3 per cent and a marginal 0.1 per cent uptick in capital values – the first positive quarterly capital growth since mid-2022.
Quarterly Sector Returns
Source: MSCI, The Property Council of Australia/MSCI Annual Property Index
Sector Performance Divergence Widens
Retail and Industrial have taken clear leadership in the recovery cycle. Retail posted a total return of 1.6 per cent in Q1 2025, underpinned by an income return of 1.4 per cent and capital growth of 0.1 per cent. Importantly, retail capital values turned positive from Q3 2024 onward, reflecting a re-rating of risk as interest rate volatility subsided and investor appetite for well-leased neighbourhood and convenience assets improved.
Industrial continues to benefit from structural tailwinds tied to e-commerce, logistics, and constrained supply. The sector has delivered four straight quarters of positive total returns since Q2 2024, culminating in 1.4 per cent in Q1 2025. Capital growth remained positive at 0.2 per cent, supported by resilient occupier demand, albeit at a slower pace than the exceptional gains of recent years. Importantly, industrial capital values have now recouped much of their earlier declines.
Office, in contrast, remains the weakest link. Although Q1 2025 marked the first positive total return (1.4 per cent) since Q1’23, this comes after a total capital value decline of 21.8 per cent since the downturn began. The office sector’s sharpest drawdown occurred in Q2 2024, with a -4.8 per cent total return driven by -5.9 per cent capital loss.
Investor sentiment remains fragile amid structural vacancy challenges and a slow return-to-office trend, however this stabilisation is no doubt welcomed by office owners.
Healthcare continues to lag the broader market, with persistent mild value erosion (-1.0 per cent capital growth in Q1 2025). Total returns remain subdued, reflecting continued repricing of lower-yielding assets amid elevated funding costs. Investors remain cautious given the long-dated cash flows and sensitivity to rate-driven valuation models.
Market-Wide Recovery Underway — But Uneven
At the aggregate level, the index signals a turning point. The continued improvement in performance suggests that valuation adjustments are largely priced in, and that capital growth, while still tepid, is no longer a major drag. Income return remains the anchor of performance, holding at ~1.3 per cent across sectors, reinforcing the case for core real estate as a yield play in a higher-for-longer interest rate environment.
Outlook
The broad-based improvement in Q1 2025, particularly in retail and industrial, supports the thesis that the Australian commercial property market is entering a stabilisation phase. Whilst headwinds persist in office and healthcare, the worst of the capital correction appears to be behind us. Sector selection will be critical going forward, as capital allocators pivot from defensive positioning toward selective re-risking in segments with clearer rental growth visibility and cyclical upside.