The best way to sum up 2023 is "RE”, and I don't mean Real Estate. Across the board, we saw investors and developers REvaluing, REassessing opportunities, REassuring investors, REsilience of strategy, REtargeting assets and REdirecting capital.
2023 saw a noticeable shift in Brisbane's commercial real estate market, significantly reducing transaction volumes. The shift mainly triggered by two factors:
- Continuing high inflation numbers, forcing the Reserve Bank of Australia (RBA) to tighten monetary policy by increasing the cash rate, 13 times since May 2022, now sitting at 4.35%, a 12-year high.
- The continuation of skyrocketing construction prices making many development sites not financially viable.
This shift influenced the majority of investors and developers to adopt a wait-and-see approach.
While some owners chose to de-leverage, we saw the yield appetite from the institutional and private markets accelerate at different rates.
2023 Brisbane's performance
Transaction volumes ↓ (~60% drop Y-o-Y): muted investment activity as a result of fewer assets coming to market and an increasing spread between seller and buyer expectations, making negotiations more challenging to bridge the gap.
Capitalisation rates ↑(up 50bps - 150bps Y-o-Y): Core and core plus assets have seen marginal cap rate expansion whilst value-add and opportunistic offerings have been repriced based on the risk & return profile of the opportunity. A significant higher cost of debt and slower decision-making from banks' credit committees has created an increasing opportunity for non-bank lenders.
Performing sectors – consumer-led retail and logistics sectors are showing the greatest resilience off the back of population growth across Greater Brisbane and substantially improved discretionary spending power from Generation Z and Boomers.
Office sector – current CBD vacancy according to recent PCA reports is sitting at 11.6%, a significant reduction from the 15.4% vacancy rate in Q1 2022. Increasing demand from government and educational tenants have absorbed large tranches whilst SME's continue to gravitate to fitted office suites. Limited supply for the near future is enticing investors to deploy capital back into CBD office. The outlook here is strong.
Living sector - PBSA (Purpose Built Student Accommodation), BTR (Build –to-Rent) and Luxury BTS (Build-to-Sell) have been standout performers as the occupier demand for these assets is robust and not wavering. Site cost + construction price has dampened development appetite.
While all sectors perform differently, certain outliers, such as industrial and medical, continue outperforming the overall market.
2024 Forecast
The burning question on investors and developers lips: “is the trajectory of inflation slowing enough for the RBA to hold rates or will we see another one or two cash rate increases in 2024?"
Although inflation is tracking down in the right direction, the consensus is we are entering into a higher interest rate environment for longer. A recent AFR survey suggested the RBA will cut rates in August 2024. In the US, the Federal Reserve held rates last week and indicated three cuts coming in 2024.
The current housing crisis and our low unemployment rate, Brisbane's 3.1% Vs Australia's 3.9% (well below the government preferred rate) are problematic for the quick recovery we would like.
South East Queensland will continue to see strong population growth, particularly from interstate migration, despite the government's plan to half the overseas migrant intake and tighten student visa rules.
2024 is an election year for Brisbane City Council (March 2024) and Queensland State Government (October 2024). Elections historically create a level of indecisiveness in the market.
Get positioned for a strong recovery across the following sectors in Brisbane:
Office sector - has the largest growth potential in 2024. Quality assets will outperform as the recovery strengthens with limited supply over the next few years to cater for the demand. WFH (Work for home) is out, BTTO (Back to the office) is in.
Consumer lead sectors, such as logistics and retail, will continue to show strong results off the back of South East Queensland population growth.
Development sites - location, location, location. Following the infrastructure lines and cater to the market. The end product has a flight to quality, and creating a differential factor will be key.
For those who view uncertainty as an opportunity and not a risk, 2024 will be the year to deploy capital to take advantage of where we are at in the cycle. Our ongoing infrastructure projects and the construction commencement of Olympic-related projects in 2025 and 2026 will materially reshape our city. The commercial real estate market is poised to be a major benefactor.
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