Property: Expected underperformance in retail and commercial

15 February 2024

Blue tint cityscape with graph overlayBlue tint cityscape with graph overlay

Prevailing macroeconomic conditions and development-hindering red tape present ongoing challenges to most segments of the property market. Industrial property remains the outperformer, and the outlook for the year ahead remains strong, albeit creeping yields will ultimately translate to softening values. In the present high cost of living environment, unlocking efficiencies in the delivery of affordable housing is critical to improving the present supply and demand imbalance, driving both increasing values and rental costs.

The high cost of capital, a baked-in construction cost surge post COVID, reduced LVR acceptability, tightened liquidity, and trade labour shortages present ongoing challenges to new developments and downward pressure on development land values. The non-bank lending sector is likely to experience more borrower defaults and will need to manage some projects carefully. We expect the following themes in 2024:

  • Residential: Housing supply shortage and migration to drive residential property prices and rents higher despite ten-year high borrowing costs and sustained costs of living pressures. Pressure on Federal and State Governments to deliver affordable housing should contribute to a rethink of red tape as well as planning restrictions on density and height. Build-to-rent projects will continue to gain pace.

  • Office: Ongoing flight to quality in CBDs and surrounds with Premium and A-Grade buildings to perform well. Sub-grade buildings susceptible to increasing vacancy rates, complete refit requirements and downward valuation pressure will lead to potential investor and financier stress.

  • Retail: Retailer insolvencies and/or financial stress will require landlords to manage vacancies and undertake tenant re-mixing and repurposing. Sub-regional malls and shopping strips will face higher tenant risk.

To navigate volatility, market participants are encouraged to be:

  • Well-prepared with cash flow forecasts, financial models and governance structures.

  • Engaged with investors, lenders and statutory bodies as creditor oversight and enforcement actions rise.

  • Prepared for downside valuation risk.

  • Proactive with alternate funding options to ensure adequate capital and liquidity.

  • Think laterally to adapt investment strategies (e.g. asset re-purposing).

  • Actively informed of federal and state government policy direction.

More from the author, Partner Matthew Caddy

Prevailing macroeconomic conditions and onerous red tape will present ongoing challenges to most segments of the property market.

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