In the first quarter of 2026, global economic uncertainty and changing local conditions have created a complex environment for property investors and occupiers. High construction costs and extended delivery timeframes are actively restricting new developments across the city. At the same time, the recent completion of major building projects has introduced new short-term backfill opportunities, causing a temporary fluctuation in office vacancy rates across the CBD and Near City precincts.

Hesitation in this transitional market could be a costly mistake.

It is easy to observe short-term vacancy increases and feel cautious about your commercial real estate strategy. However, delaying your investment or leasing decisions means you risk missing a very specific strategic window. With limited new office supply coming online, and no major developments committed after the upcoming 2027 and 2028 project completions, the market is poised to tighten significantly. If you do not act while this current stock is available, you will face intense competition and increased downward pressure on vacancy as long-term population growth and interstate business migration absorb the existing space.

Secure your strategic advantage with our Capital Transactions insights.

To help you capitalise on these current market dynamics, the Capital Transactions team at McGees Property Brisbane has compiled a comprehensive Q1 2026 Market Snapshot. We have tracked buyer origins, freehold transaction volumes, and notable property sales to provide you with the clarity you need to move forward with confidence.

We have visualised these critical trends in the interactive report below. Please explore the graphs to understand the exact trajectory of Brisbane office vacancies and review the most significant recent property transactions.

For investors and occupiers, the data highlights a clear opportunity to secure high-value commercial assets before tighter conditions return. Do not leave your property strategy to chance. Review the interactive market data below, and then contact our Brisbane commercial real estate experts to discuss how these insights can strengthen your portfolio.

For a complete list of weekly commercial transactions in Queensland, visit McGees Wrap Up | McGees Property Brisbane

Disclaimer: The information provided in this blog is for general informational purposes only and does not constitute legal, financial, or professional advice. While we strive for accuracy, we make no guarantees regarding the completeness or timeliness of the content. Always seek independent advice before making any financial or real estate decisions. We are not liable for any loss or damages arising from your reliance on the information provided.

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Current Market Performance

Investor appetite for Brisbane office assets is continuing to strengthen. Syndicators, super funds, and private capital are increasingly active as they pursue yield and assets in high-value locations that require minimal short to medium term capital expenditure. At the same time, investors remain sensitive to leasing risk and tenant incentives, with tenant demand increasingly concentrated in Premium and A-Grade buildings as they continue to rationalise footprints and prioritise quality over quantity.

Current CBD Office Market

🏢

2,405,730 square metres

New Supply Under Construction

🛠️

89,500 square metres

(3.72 percent)

17,500 square metres – 450 Queen Street (2027)

72,000 square metres – Waterfront Brisbane North Tower (2028)

2025 Net Absorption

37,480 square metres

Understanding the Market Data

Net absorption is the net change in occupied space. It is a vital metric for understanding market health because it measures the total amount of space leased minus the amount of space vacated. A positive figure confirms that more space is being occupied than is being vacated, which indicates resilient tenant demand.

37,480 square metres of positive net absorption confirms that businesses are actively choosing to occupy more space in the Brisbane CBD, which is a sign of a healthy, growing market

Future Outlook

Beyond the current cycle, the development outlook in the office sector appears extremely thin. It is highly likely we will see mooted projects deferred, materially downsized or repositioned towards residential use, largely due to elevated construction costs and elongated delivery timeframes. This tightening supply dynamic is likely to reinforce continued upward pressure on effective rents, softening incentives and improving valuations, particularly for well-located, high-quality buildings.

Contact the Capital Transactions Team

Reach out to our team if you are looking to sell or buy in the Brisbane CBD or Near City markets.

Hugh Menck
Phone: 0432 560 589
Email: hmenck@bne.mcgees.com.au

Archer Halliday
Phone: 0497 599 959
Email: AHalliday@bne.mcgees.com.au

Disclaimer: This information is for general purposes only and should not be relied on as advice. You should consider your personal situation and seek advice that is specific to your circumstances before making any decisions based on this information. Liability limited by a scheme approved under Professional Standards Legislation.

For a complete list of weekly commercial transactions in Queensland, visit McGees Wrap Up | McGees Property Brisbane

Disclaimer: The information provided in this blog is for general informational purposes only and does not constitute legal, financial, or professional advice. While we strive for accuracy, we make no guarantees regarding the completeness or timeliness of the content. Always seek independent advice before making any financial or real estate decisions. We are not liable for any loss or damages arising from your reliance on the information provided.

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CAPITAL TRANSACTIONS

Delivering Proven Results in the Childcare Sector

Momentum in the childcare sector remains strong, and our recent deals reflect this sustained confidence. Our latest transaction is a 103-place lease commitment from a top-tier operator in a soon to be built centre.

25–27 JONES ROAD, BELLBIRD PARK – LEASE

103 PLACES

For further information contact the Capital Transactions team

Contact the Capital Transactions Team

Hugh Menck
Phone: 0432 560 589
Email: hmenck@bne.mcgees.com.au

Archer Halliday
Phone: 0497 599 959
Email: agent@domain.com

Disclaimer: This email is for general information only and should not be relied on as advice. You should consider your personal situation and seek advice that is specific to your circumstances before making any decisions based on this information. Liability limited by a scheme approved under Professional Standards Legislation.

For a complete list of weekly commercial transactions in Queensland, visit McGees Wrap Up | McGees Property Brisbane

Disclaimer: The information provided in this blog is for general informational purposes only and does not constitute legal, financial, or professional advice. While we strive for accuracy, we make no guarantees regarding the completeness or timeliness of the content. Always seek independent advice before making any financial or real estate decisions. We are not liable for any loss or damages arising from your reliance on the information provided.

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Now, all eyes turn to the next meeting on the 8th of August, where softening inflation, unemployment and geopolitical tension are adding weight to the case for the easing cycle to push forward.

Market sentiment is shifting. Recent inflation data for the March quarter came in at 2.9% (trimmed mean), within the RBA’s target range of 2-3% and last week unemployment unexpectedly increased to 4.3%. With the next quarterly inflation figures due on the 30th of July, and labour force data released, the futures market is pricing in a 98% chance of an August rate cut.

What does this mean for investors?

• Cost of debt is still high but expected to ease. For buyers, even a 25bps cut could improve borrowing capacity and asset pricing.
• Yield expectations remain elevated, but we’re seeing compression in some sectors, particularly where there are long leases in defensive sectors.

Geopolitical tensions add complexity. Trump’s global reciprocal tariffs and proposed 200% tariffs on Australian pharmaceuticals have caused great uncertainty. International risks could dampen Australia’s export economy – indirectly strengthening the RBA’s case to stimulate domestic demand.

Investor demand remains strong in key sectors:

• Industrial continues to lead, particularly in land-constrained metro markets.
• Retail is performing, with high-performing neighbourhood and convenience assets drawing attention.
• Childcare and medical are seen as defensive. With strong lease covenants and long WALEs, they are considered as an asset safe haven.
• Office transaction volumes are increasing with face rents rising and softening interest rates, likely to bring more Core and Core-Plus investors back into the market.

Looking ahead:

• The next quarterly CPI data (due end of July) and unemployment figures released last week will be critical to the RBA’s decision in August.
• If current trends hold, expect the market to price in a 25bps rate cut by the August meeting – potentially greater if geopolitical shocks accelerate.

For further information contact:

Hugh Menck MRICS

Head of Capital Transactions

hmenck@bne.mcgees.com.au

+61432560589

Archer Halliday

Analyst | Capital Transactions

ahalliday@bne.mcgees.com.au

+61497599959

For a complete list of weekly commercial transactions in Queensland, visit McGees Wrap Up | McGees Property Brisbane

Disclaimer: The information provided in this blog is for general informational purposes only and does not constitute legal, financial, or professional advice. While we strive for accuracy, we make no guarantees regarding the completeness or timeliness of the content. Always seek independent advice before making any financial or real estate decisions. We are not liable for any loss or damages arising from your reliance on the information provided.

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Purpose-Built Student Accommodation (PBSA) in Brisbane: Supply vs. Demand

International and domestic student numbers in Brisbane continue to rise, but PBSA supply has failed to keep pace. There are 7,118 student beds under construction, development approved or waiting to be approved – second in the country behind Melbourne – however construction delays are growing due to rising costs and labour shortages. Instead, students are turning to the already tight private rental market.

Land Lease Communities (LLCs): An Affordable Housing Solution

Land lease communities are gaining traction as a viable housing solution, particularly for retirees and downsizers seeking affordability and community living. Unlike traditional homeownership, residents purchase their home but lease the land from the operator, avoiding stamp duty and often benefiting from lower living costs.

Demand for LLCs is growing in Brisbane’s outskirts as baby boomers downsize. However, the rising cost of land, labour shortages, and inflation-driven construction expenses are making it harder for developers to keep prices at an accessible level. Additionally, supply constraints mean waiting lists for new homes are lengthening. With the massive scale of these communities, builders can afford tighter margins due to increased housing numbers and by providing set build options that already fit the construction constraints.

This $12 billion sector is the fastest-growing downsizing solution in the country and, if trends follow those seen in the U.S., these communities may evolve to serve both downsizers and offer more affordable options for first-time buyers and families.

Build-to-Sell (BTS) Challenges in Brisbane’s Housing Market

Brisbane’s BTS sector is also struggling under supply constraints. Apartment construction rates are well below the levels needed to meet population growth, with many projects stalled due to financing challenges and increasing costs.

Since 2020, Brisbane has delivered less than half of the apartments required to meet government housing targets, with an annual shortfall of up to 1,000 units projected until 2027. For high density residential projects, Rawlinsons estimates construction costs range from $3,170/m2 for basic apartments to $5,425/m2 for higher end developments. As such, higher development costs are making projects less viable, leading to fewer new units hitting the market. The consequence? Higher prices and increased competition for existing stock.

Build-to-Rent (BTR) Initiatives and Obstacles

Build-to-rent has been positioned as a solution to the city’s rental crisis, offering long-term rental options in professionally managed developments. The Queensland government has introduced several measures to stimulate BTR construction, including:

• Reduction in management investment trust (MIT) withholding tax coming into effect on July 1st 2024.
• A reduction in land tax of up to 50% for up to 20 years for BTR developments that feature at least 10% of rental homes as affordable housing.
• A full exemption for the 2% foreign investor land tax surcharge for up to 20 years.
• 100% reduction in the taxable value of land for land tax foreign surcharge, for land used solely or primarily for an eligible BTR development.
• 100% discount on any additional foreign acquirer duty (AFAD) for land used—or to be used—for an eligible BTR development.

Despite these incentives, labour shortages and rising construction costs continue to hamper the delivery of new BTR projects. If these challenges persist, the sector may struggle to provide the relief needed for Brisbane’s housing stress in the short to medium term.

With numerous macro and micro factors shaping the market, investors are understandably cautious about 2025. However, Brisbane’s real estate sector is poised for continued growth, fueled by strong economic drivers including population increase, robust housing demand, infrastructure development, healthy consumer spending, and positive market sentiment. This report delves into the key insights and forecasts for the first half of 2025, providing a comprehensive overview of the market’s trajectory.

Interest Rates: A “High-for-Even-Longer” Scenario

Contrary to earlier predictions of rate cuts in 2024, the Reserve Bank of Australia (RBA) has maintained elevated interest rates into 2025 to combat persistent inflation. Potential rate reductions throughout 2025 hinge on the quarterly inflation figures released on January 29th, ensuring inflation remains within the 2-3% target range. The Big 4 banks are optimistic about this outcome, forecasting multiple rate cuts:

• Commonwealth Bank: First cut in February 2025, targeting a cash rate of 3.35% with 4 cuts.
• Westpac: First cut in May 2025, also aiming for a cash rate of 3.35% with 4 cuts.
• NAB: First cut in May 2025, projecting a cash rate of 3.60% with 3 cuts.
• ANZ: First cut in May 2025, anticipating a cash rate of 3.85% with 2 cuts.

Federal Election 2025: Policy Impacts on Real Estate

The Australian federal election, scheduled on or before May 17, 2025, is expected to significantly influence economic policies. Key issues such as housing affordability, cost of living, healthcare, and climate change will likely determine the election’s outcome. Policy announcements and promises will be closely scrutinized for their potential impact on the real estate market.

“Trumpeconomics” and Global Trade Tensions

The potential re-election of President Donald Trump and his proposed tariffs, particularly on China, Canada, and Mexico, could escalate geopolitical tensions and affect global trade dynamics. While Australia’s exports to the USA are largely tariff-free, indirect impacts through China’s economy may affect Australian export demand. Weaker export demand and slower growth could exert downward pressure on policy rate expectations and the Australian dollar.

Olympics 2032: 100-Day Review and Infrastructure Development

The 100-day review of the 2032 Brisbane Olympics, with a final report due on March 8, 2025, will evaluate affordability, infrastructure demand, connectivity, and deliverability. Potential developments, such as a new stadium in Victoria Park or major redevelopments of the Gabba or QSAC, are expected to stimulate investment and development in surrounding areas.

Construction Productivity and Regulatory Changes

The Queensland Government’s decision to pause Best Practice Industry Conditions (BPICs) on new government-funded construction projects aims to increase competition, reduce costs, and enhance productivity. The re-establishment of the Queensland Productivity Commission (QPC) will further shape industry policies, balancing value creation with fairness and safety, creating a more predictable regulatory environment.

Private Credit and Development Financing

Private credit is playing an increasingly significant role in funding development projects and commercial acquisitions. However, rising interest rates, construction costs, and development risks are leading private lenders to adopt a more risk-averse approach.

Foreign Investment: Leveraging a Weak AUD

The weak Australian dollar is expected to attract increased foreign investment in 2025. Compared to the 10-year averages, current spot prices against major currencies are significantly lower:

• AUD/USD: 10-year average 69.5493, current 62.3007
• AUD/SGD: 10-year average 94.4668, current 85.2254
• AUD/HKD: 10-year average 558.6846, current 483.9454

Bright Spots in Brisbane’s Real Estate Market

Office Sector

The demand for A-grade office space in Brisbane’s CBD continues to rise, driving vacancy rates to new lows and pushing rental growth. Brisbane’s A-Grade vacancy has decreased from 15.8% to 7.4% (-53.17% y-o-y). Brisbane’s CBD average rents grew by 9.6% (y-o-y) to $804/sqm, outpacing national averages.

Childcare Sector

The childcare industry is experiencing steady growth, supported by increasing demand and government initiatives. Investments in this sector, characterized by triple net leases, annual CPI increases, and long lease terms, remain attractive to private and SMSF investors.

Living Sector

Brisbane’s residential vacancy rates remain low at 1.1%, driving dwelling value increases. Domain forecasts a 5-7% increase in house prices and a 7-9% increase in unit prices for Brisbane, outperforming national averages. The Built-to-Rent and Purpose-Built Student Accommodation sectors are also experiencing significant development.

1H 2025: Risk or Opportunity?

The first half of 2025 presents both risks and opportunities in Brisbane’s commercial real estate market. Uncertainty surrounding interest rates, global economic factors, and Olympic decisions will shape the market. While some investors may adopt a cautious “wait-and-see” approach, others will seize the opportunity presented by a less competitive landscape.

For a complete list of weekly commercial transactions in Queensland, visit McGees Wrap Up | McGees Property Brisbane

Disclaimer: The information provided in this blog is for general informational purposes only and does not constitute legal, financial, or professional advice. While we strive for accuracy, we make no guarantees regarding the completeness or timeliness of the content. Always seek independent advice before making any financial or real estate decisions. We are not liable for any loss or damages arising from your reliance on the information provided.

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International students represent a critical source of revenue for Australian universities and contributed $48 billion in 2023 to the national economy. There were 793,335 international students studying in the first semester of 2024, the majority of which are Chinese and Indian nationals, with Queensland accounting for 15% of the total. Recent caps on the number of new international students’ universities can enrol will commence in 2025 was aimed to reduce the strain on housing in the short term, but recent findings from Group of Eight Australia suggest there is no direct link between international student numbers and the nation’s current housing crisis, but rather long-term structural supply issues in the housing market are the real cause for rental pressures.

With Brisbane’s increasing popularity as a destination for both domestic and international students, driven by the presence of leading educational institutions like the University of Queensland, Queensland University of Technology, and Griffith University, the demand for student housing has seen a sharp rise. In response, PBSA developments are reshaping the accommodation landscape, offering a dedicated, amenity-rich environment tailored to the specific needs of students.

One of the most pressing issues for both Australian citizens and international students is access to affordable and suitable housing. Brisbane has experienced a housing crisis exacerbated by rising rents, low vacancy rates, and an overall lack of affordable accommodation. As a result, PBSA has emerged as a solution to accommodate university students while freeing up local rentals. The demand for PBSA has surged with new CBD developments such as Brookfield’s 240 Margaret Street, the repurposing of 150 Charlotte Street and Dexus & Marquette’s repurposing of 41 George Street all in the pipeline. However, with protracted construction timelines and increased construction costs, new supply is struggling to keep up with demand.

The Federal Government has capped the number of new international students commencing in 2025 at 270,000 with individual caps placed on specific universities. Simultaneously, the government will implement regulatory requirements to ensure universities deliver more PBSA. This will increase the level of housing supply and help ensure that increases in international student numbers do not put pressure on the domestic housing market. The government’s caps on international students for individual universities will be influenced by how much PBSA they provide, requiring universities to establish new PBSA if they wish to increase their enrolments above their initial allocation. Any new accommodation will be available to both local and international students reducing pressure on house prices and rents in major cities ensuring universities and the Australian economy can benefit from the lucrative overseas market.

Brisbane universities are already planning ahead with UQ announcing a new development of 1,018 beds adjacent to the existing Kev Carmody House on Walcott Street and QUT’s decision to take over the 41 George Street redevelopment. With Griffith University’s upcoming conversion of the Treasury Building into a CBD campus and the demand from other universities to secure PBSA beds, confidence in the sector is at an all-time high. Developers, operators and investors are eager to capitalise on the government’s mandates ensuring they are not left behind. With large amounts of private funding from numerous both domestic and international funds such as Australian Unity, Brookfield and Nuveen, billions of dollars have already flooded the sector with more expected to come.

Hugh Menck MRICS

Head of Capital Transactions

hmenck@bne.mcgees.com.au

+61432560589

Jason Lynch

Capital Transactions

jlynch@bne.mcgees.com.au

+61404092422

Archer Halliday

Analyst | Capital Transactions

ahalliday@bne.mcgees.com.au

+61497599959

For a complete list of weekly commercial transactions in Queensland, visit McGees Wrap Up | McGees Property Brisbane

Disclaimer: The information provided in this blog is for general informational purposes only and does not constitute legal, financial, or professional advice. While we strive for accuracy, we make no guarantees regarding the completeness or timeliness of the content. Always seek independent advice before making any financial or real estate decisions. We are not liable for any loss or damages arising from your reliance on the information provided.

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Brisbane’s momentum is building, and the majority of the city’s industries and services are growing. Brisbane is the fastest growing major Australian capital city over the past 10 years with a further 34% growth expected over the lead up to the 2032 Olympic Games. Stable governance and ease of doing business turn growth opportunities into reality, exemplified by Brisbane’s Average time to development application approval – faster than that of Sydney and Melbourne by 38%.

Brisbane’s competitive operating environment coupled with leading education and research centres and the highest rates of technical trades attainment in the country, combines to give Brisbane the competitive edge over other state capitals. With a $25 billion infrastructure pipeline, Brisbane is fueled for growth giving investors’ confidence moving forward.

Queen’s Wharf Brisbane

Currently partially opened, Queen’s Wharf is one of the largest urban renewal projects in Australia and the largest ever in the Brisbane CBD. With the recent completion of the Casino, Skydeck and Hotel, residents have flocked in numbers to enjoy the new state of the art amenities. The final product will be an iconic nation shaping development.

The end result is expected to deliver 12 hectares of riverfront land, 4 new luxury hotels & numerous retail offerings, and additional 1.39 million annually and over $4 billion boost to Queensland’s Gross State Product.

Cross River Rail

Cross River Rail is a new 10km rail line from Dutton Park to Bowen Hills, which will incorporate six new station routes via the Brisbane CBD: with four new underground stations at Boggo Road, Woolloongabba, Albert Street and Roma Street.

Albert street station is the first new CBD train station in more than 120 years. With an estimated 67,260 users daily, the station will help connect the midtown precinct to greater Brisbane, allowing for easy access to the Queens Wharf, Waterfront Brisbane and Queen Street Mall.

Brisbane Metro

The Brisbane Metro will provide high capacity and high frequency Metro services along a 21-kilometre service from Eight Mile Plains to Roma Street, and Royal Brisbane and Women’s Hospital to University of Queensland connecting the CBD to the Brisbane suburbs. The $1.2 billion development will feature 18 stops over a 21km service with a potential expansion in time for the 2032 Olympics. These expansions will aim to connect proposed Olympic venues in order to target 90% public transport travel during the games with extensions to the airport, Capalaba, Springwood and Carseldine.

Treasury Building

Griffith University recently purchased the remaining leasehold for the former Treasury Casino for $67.5 million which expires in 2070. Griffith will transform the Heritage Building into a new campus dedicated to Business, IT and Law faculties as well as postgraduate education. The campus will accommodate 7,000 students by 2035 attracting both local and international students providing a space for collaboration, innovation and community involvement. Its central location adjacent to the Queen Street Mall in tandem with the Queens Wharf Development will revitalise western end of the CBD increasing investor confidence as the area becomes a place to live, learn and play in the lead of the lead up to the 2032 Olympics.

Howard Smith Wharves new proposed DA

Artemus Groups, led by Adam Flaskas, have proposed an overhaul of Howard Smith Wharves with a visionary development to replace Felons Barrel Hall and revitalise the eastern edge of the wharves. The proposed 77-room hotel will take over the existing Felons Barrel Hall but will still accommodate a retail precinct and a music hall on the ground floor. A revitalization of Bougainvillea House will feature a second story and the Rivershed renovations will feature a pool deck with an overwater pool, bar and dining precinct offering patrons epic river views. Two new lifts and expanded riverfront public spaces will provide greater access and thoroughfare throughout Howard Smith Wharves. Although the Howard Smith Wharves is already one of the business retail precincts in Brisbane, this further investment shows an increased level of confidence in the market and a steady forecast for consumer spending despite the increased cost of living and higher construction costs.

Waterfront Brisbane

Dexus’s $2.5 billion redevelopment project for Eagle Street Pier is set to transform the area into a world class business and leisure destination. Project delivery includes and integrated, 9,000m2 of open space, 2 mixed use office towers and a podium totalling 145,190m2 gross floor area (Tower 1: 75,331m2, Tower 2: 59,999m2, Podium: 9,860m2). With the first tower due for completion in 2028 and already 49% pre committed by world class tenants, investors and developers remain confident that significant capital deployment in Brisbane will result in immediate returns due to the high demand for premium office and retail space.

Office Sector

The Brisbane CBD office market is the best performing out of the three biggest east coast markets. With a vacancy of 9.5%, and 12-month prime grade rental growth to July 2024 of 8.1% the Brisbane CBD drastically outperformed its southern counterparts. With limited supply in the pipeline, investors can be assured that vacancy will continue to tighten and rents will continue to grow providing increased valuations and stronger sentiment in the market.

There are 6 major CBD office towers approved with only 3 under construction and expected to be completed before 2029. Although there is 162,371m2 of lettable area under construction and subsequent backfill opportunities present once completed, there is a much higher demand for prime office space in Brisbane compared to secondary assets. This sentiment boosts both investors and developers’ confidence to build / refurbish new state of the art offices that meet the market needs.

For further information contact:

Hugh Menck MRICS

Head of Capital Transactions

hmenck@bne.mcgees.com.au

+61432560589

Jason Lynch

Capital Transactions

jlynch@bne.mcgees.com.au

+61404092422

Archer Halliday

Analyst | Capital Transactions

ahalliday@bne.mcgees.com.au

+61497599959

For a complete list of weekly commercial transactions in Queensland, visit McGees Wrap Up | McGees Property Brisbane

Disclaimer: The information provided in this blog is for general informational purposes only and does not constitute legal, financial, or professional advice. While we strive for accuracy, we make no guarantees regarding the completeness or timeliness of the content. Always seek independent advice before making any financial or real estate decisions. We are not liable for any loss or damages arising from your reliance on the information provided.

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While these are important environmental factors, ESG covers a much broader range of issues, such as labour practices, product safety, data security, diversity, and business ethics, which are important parts of investors’ due diligence.

Currently, 40% of CO2 emissions worldwide come from real estate (Carlin, 2022) while 10% of Australia’s Carbon emissions are a by-product of the commercial property sector (DCCEEW, 2024). To achieve Australia’s net zero target by 2050 swift action needs to be taken within the property market to reduce carbon emissions.

Forcing the Stakeholder’s hand

With an increasing environmentally conscience population dealing with the effects of climate change, corporate occupiers demand a higher level of ESG reporting and compliance. To effectively improve ESG performance, it must be morphed into a company’s corporate strategy, with 70% of investors advocating for the integration of ESG into a firm’s framework (PWC, 2024).

Rather than doing the bare minimum, landlords and occupiers need to demonstrate leadership to show their stakeholders they mean ‘business’ by implementing ESG practices into everyday operations. Those landlords who seek high-profile tenants who are subject to ESG reporting and do not move forward with ESG practices will be left behind, as high-grade tenants will seek out landlords who keep up to date with the latest and greatest ESG programs.

Do Not Fall behind

Despite the obvious positive environmental and social benefits of environmentally friendly investments, a substantial monetary upside encourages firms to ‘do the right thing’, and those landlords who don’t will be left behind.

Increasingly landlords and occupiers are considering ESG value drivers in the deal process. As part of their due diligence, investors are now assessing how they can avoid value erosion and increase their value through environmentally conscious investments, creating a win-win situation for their investors.

Market trends indicate that buildings with a higher NABER rating receive a higher premium on rents, yields and increased occupancy. For each increase in rating, rents can be 4% higher and the higher the rating the lower the cap rate. In addition, energy accounts for 15% of a building’s operating costs, making it attractive to property owners to become ESG-friendly.

Like NABERs rated assets, Green Star-rated assets also produce better returns (Green Building Council Australia, 2023):

• 16.4% higher capital value/m2
• 13.5% higher annual return
• 23% longer WALE
• 66% less electricity
• 51% less water

There are many simple ways to improve a building NABER rating to reap the rewards:

• Replacing lighting with LED fixtures and occupancy sensors can reduce electricity for lighting by up to 75%
• Installing water-efficient fixtures
• Heating, Ventilation and Air-Conditioning (HVAC) account for most of the costs in a commercial building. Replacing old units can reduce electricity buy 10%
• Implementing proper ventilation and air filtration systems to maintain good indoor air quality.

ESG and Financing

Australian banks employ various ESG risk management strategies to ensure responsible lending and investment practices. These include Integration in Risk Framework, ESG in Credit analysis and assessment of High-Risk Sectors which determine the credit spread of a given loan.

Financial institutions have also updated their lending guidelines to include a ‘no risk appetite’ list of business they are unwilling to finance due to associated ESG risks. This typically includes sectors that are considered to have a higher inherent exposure to ESG risks or are misaligned with the lenders sustainability goals.

These align with a part of a broader commitment to sustainable goals and align with international regulatory expectations. By taking into account the environmental, social and governance impact of a loan, banks can determine the sustainability of the business they finance, ensuring their lending practices align with their broader ESG goals.

An example of this is the Commonwealth Banks’s $2.2 billion sustainability loan to the Royal Adelaide Hospital raising the standard for sustainability goals and social inclusion in major infrastructure projects. As part of the terms, Celsus (management firm) is required to report publicly how it’s fulfilling its objectives for social inclusion and sustainability.

Sustainability-linked loans (SLLs)

SLLs create a direct two-way link between sustainability performance and funding costs. As such, pricing marginally increases or decreases depending on the sustainability performance of the borrower, which is assessed by a third-party.

Whether financial or not, incorporating a penalty provides ‘skin in the game’ and enhances the credibility of the loan while incentivising the borrower to exceed current sustainability performance. The SLLs present an incentive to change behaviour, creating an opportunity for different outcomes that are more likely to get corporate borrowers interested.

An example of this is Sydney Airport’s $1.4 billion SLL. If the company meets its sustainability targets, it receives a monetary deduction from its repayments; however, if it fails to meet its goals, it receives a non-financial penalty. This incentivises the borrower to meet its targets for a financial reward but also protects the lender’s reputation for ESG practices.

Setting up a Profitable Exit

ESG is now critical to secure a profitable exit in commercial real estate. With investors and funds so focused on meeting environmental targets to please stakeholders and secure funding, ESG has never been more crucial to a building’s success. With higher rents and lower cap rates associated with higher ESG ratings, investors looking to divest their portfolio will see higher prices and a more profitable exit if they focus on ESG efforts.

The Future of ESG

There are currently two rating systems in place, NABERS (National Australian Built Environment Rating System) and Green Star, which are voluntary programs scored out of six that assess a building’s ESG rating based on a range of environmental indicators. However, a NABER energy rating is compulsory whenever an office building larger than 1000m2 is either sold or leased (NABERS, 2024).

There are no mandatory real estate-specific ESG reporting requirements; however, ESG regulation will become more stringent. There is legislation in place from the Australian Treasury for large companies to produce mandatory climate reports over the next few years that meet at least two out of three criteria as follows (Button, 2024):

Group 1 (reporting period starting July 2024)

• Revenue > $500 million
• Assets > $1 billion
• Employees > 500

Group 2 (reporting period starting July 2026)

• Revenue > $200 million
• Assets > $500 million
• Employees > 250

Group 3 (reporting period starting July 2027)

• Revenue > $50 million
• Assets > $25 million
• Employees > 100

As such, landlords seeking large-quality tenants subject to these reporting guidelines will be forced to upgrade their buildings to meet the tenant demand and see premium rents.

For further information contact:

Hugh Menck

Head of Capital Transactions

hmenck@bne.mcgees.com.au

+61 432 560 589

Archer Halliday

Analyst | Capital Transactions

ahalliday@bne.mcgees.com.au

+61 497 599 959

For a complete list of weekly commercial transactions in Queensland, visit McGees Wrap Up | McGees Property Brisbane

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