After a testing year, what does 2024 have in store? Hear from experts who predict what the next 12 months might look like, from a better acquisition environment to more supply issues and demand for proptech.
Alternative sectors set to benefit
When it comes to asset selection, the wider shift in the global investment landscape that has seen investors seek greater exposure to alternative sectors is predicted to continue in 2024, according to the Knight Frank Australian Horizon 2024 report.
Within the alternative sectors, residential living sectors are in vogue, led by build-to-rent (BTR) but also encompassing student accommodation and retirement living.
“The shift to living sectors is part of a wider shift from major institutions globally to focus predominantly on core investment strategies as they seek more exposure to the relative stability of the living sectors in response to a more uncertain global economic outlook,” Knight Frank Head of Alternatives Tim Holtsbaum said.
“Related to this, investors are also gravitating toward living sectors because they offer the ability to adjust rental income streams more quickly than other sectors in response to high inflation.
“These drivers will remain in place in 2024, and we expect a further expansion of interest in BTR and other living sectors to be reflected in continued growth of the pipeline and additional capital partnerships being formed. However, we expect to see more variation in the strategies of different investors, with groups seeking large scale defensive investments favouring BTR while groups with a higher return target will gravitate to other assets types such as co-living and student accommodation.”
But also keep an eye on hotels and industrial
According to Savills Australia’s Spotlight on 2024 Report, industrial, hotels, and alternatives will be among the most popular asset classes in 2024, as greater clarity around the interest rate outlook and further pricing adjustment drives a recovery in investment activity.
Savills expects that ongoing strong population growth and a recovery in tourism will continue to boost consumer demand, supporting demand for space in the industrial, retail, and hotels sectors.
“The sectors that are benefitting the most from tailwinds are industrial and logistics, hotels, multi-family residential and student accommodation, and these sectors remain attractive to investors due to robust population growth, and the rebound in tourism and international education,” Chris Naughtin, National Director, Capital Markets – Research at Savills Australia & New Zealand said.
Savills Australia & New Zealand CEO Paul Craig said the Australian Hotel sector is one to watch in 2024.
“We expect national occupancy recovery to continue fuelling the resurgence of the market. ADR is now well above pre-COVID levels and up by 32 per cent on average. Meanwhile RevPAR levels have stabilised across all cities – with Brisbane, Gold Coast and Darwin reflecting the highest RevPAR growth.”
Colliers CEO Malcom Tyson said growth in the industrial market is expected to continue driven by tight incentives, low vacancy and rental growth.
“While rents moderated slightly over Q3 2023, the Prime national weighted average rental growth rate (four per cent) was still significantly higher than the previous decade’s average quarterly growth rate (1.3 per cent).
“Rents continued to offset yields to ensure average national Prime values increased by 2.1 per cent over Q3 2023.
“We predict rental growth for a market that is currently renowned for the tightest vacancy rate globally (one per cent), will continue to exceed the historical average rate, since 50 per cent of Industrial supply for 2024 is already pre-committed.
“After three years of core plus capital chasing short WALE Industrial assets and benefitting from the pace of rent uplifts, we’ll now see core capital become more active, targeting quality assets with long WALEs.”
Retail supply issues
Demand will outpace market supply of Australian retail centres, according to Mr Tyson.
“[The sector] saw strong sales performance incur positive rental growth across all retail assets over Q3 2023 and an average occupancy rate of 99 per cent nationally,” he said.
“Existing retail assets will reap the benefits of an undersupply of 2.2 million square metres of floorspace nationally by 2032, potentially absorbing an additional $20.5 billion in sales by today’s market metrics.”
2024 will be a better year to acquire assets
After a tumultuous period over 2022 to 2023, the commercial property market can look ahead to consolidation and the prospect of a recovery emerging in 2024, according to Knight Frank Chief Economist Ben Burston.
“The sustained pressure of higher rates has naturally put pressure on asset values and this is still playing out to varying degrees,” he said.
“Part of the uncertainty has been a disconnect between formal valuation metrics and market sentiment. However, with more deal evidence now coming through and formal valuations likely to be adjusted further in the December cycle, we expect the gap between sentiment and formal valuations to erode substantially over the next six months so that by mid-2024 the picture will be clearer for buyers and sellers alike, helping to restore confidence and liquidity.”
Mr Burston added that while reductions in asset value are never welcome, the flipside is the re-emergence of value looking forward.
“Higher yields act to reset the market and provide a more attractive entry point for investors, generating the prospect of higher returns,” he said.
“This is clearly illustrated when we assess historic market cycles and the performance achieved after pricing is reset in the aftermath of interest rate hiking cycles. The period immediately after the conclusion of the rate hike cycle ending in 1994, 2000 and 2010 was in each case a very attractive time to buy, achieving above average returns over the following five years.
“This is not to say that history will repeat, and investors cannot take for granted that interest rates will fall exactly as anticipated. But careful asset selection will maximise the chances of strong performance whether it is achieved through income growth or boosted by a return to yield compression as interest rates revert in 2024-26.”
Savills is predicting investors to divest low-grade assets as investors look to rebalance their portfolios and redeploy capital to opportunities with stronger risk-return prospects, further adding to investment market liquidity.
Demand for platform-driven models
According to Prabhu Ramachandran, CEO & Co-founder of Facilio, the demand for platform-driven models will persist, but the winners will be those purpose-built and impact-driven solutions.
“Cost optimization remains a paramount concern for property operators,” he said.
“We also expect software buying decisions to become more strategic; a piecemeal approach to software buying will be replaced by portfolio level priorities.
“Despite tech spend reductions in various industries, there is a considerable uptick in demand for AI-driven tools that directly impact revenue by lowering operational and energy costs.
“For real estate owners and operators, the focus in 2024 will be on improving workforce efficiencies and enhancing tenant experiences. These priorities align with the industry’s evolution towards purposeful and impactful proptech solutions.”