Why 2024 will be a better time to buy commercial property

The insights are contained within an update to the Australian Horizon 2024 report update, titled “Window opening as twin gaps close”.

According to Knight Frank chief economist Ben Burston, there’s a window now opening for commercial property investors, with the report detailing the three key developments driving the better market conditions for investors who are looking to acquire assets.

Burston noted that since October, “inflation in the major global economies has fallen substantially, and as each month passes we are getting closer to a turn in the interest rate cycle, with Europe leading the way in shifting to rate cuts”.

He raised: “In Australia, forward rates currently imply that the cash rate will drop by around 50 basis points by end 2025, and many forecasters are much tipping larger reductions.”

And with decreasing differences between buyer and seller expectations leading to the further fall in valuations across the back quarter of 2023, the economist has an optimistic view of the future of commercial transactions.

In summary, a better environment for investors is being driven by:

1. A decidedly more favourable macroeconomic background.
2. Narrowing bid-ask spreads
   - The decreasing gap between buyer and seller expectations.
3. A shift in the outlook for relative returns across asset classes
   - Which has effectively closed the gap between pricing in public markets and slower moving private markets that has impacted sentiment for the last two years.

The chief economist reflected that “during 2023, few were willing to deploy additional capital to real estate, but as pricing adjusts the outlook is looking more favourable on both an absolute and relative basis”.

And now, the better environment is expected to “start to entice investors back”.

Burston explained that following the extended period of inactivity, domestic institutions and cross-border investors will be ready to reappraise, with some choosing “to flick the switch back to acquisition mode”.

“In addition, pent up demand from both investors and vendors to trade and reposition their portfolios continues to build and as the level of uncertainty around the outlook eases and downside risks dissipate, a deeper pool of assets will come to market.”

Despite the optimism, Burston said the emerging situation is not without its caveats, warning “this is not to say that it will all be smooth sailing”.

He advised “the adjustment of formal valuations has still not entirely played out and will remain a brake on activity for the time being”.

“And the macro outlook, while much more favourable than a year ago, is still uncertain and the ‘last mile’ of the inflation fight may prove stubborn, impacting the willingness of the RBA to change tack,” he outlined.

“But as time goes on, it will become apparent that the risks are two-way.”

“History suggests that property markets can move quickly, and the best buying often comes hot on the heels of a downturn, as evidenced by the returns generated by the early movers who shifted into acquisition mode in late 2009,” he concluded.

Share