Commercial property to deliver double digit growth in 2020

Commercial property to deliver double digit growth in 2020

22 November 2019

The Australian commercial real estate market will see further growth in capital values and strong returns, as the impact of lower interest rates flows through and creates the conditions for yield compression, according to the latest research from Knight Frank. 

Knight Frank’s Outlook 2020 Report provide a series of predictions on the outlook for the Australian property market in 2020, and beyond. The report assesses global and local economic trends which will shape performance within the office and industrial markets.

“As a result of a sharp downward shift in interest rates, and the prospect of further RBA action, we expect the investment market will drive to new highs in 2020, prolonging the property price cycle,” said Ben Burston, Knight Frank’s chief economist.

Australia’s commercial real estate markets are poised to deliver double-digit returns in 2020 for the sixth consecutive year as sharply lower interest rates drive further yield compression and support capital growth.

“The shift in interest rates has changed investor perception of pricing and the outlook, and we now see major investor groups, both local and offshore, gearing up for the next phase of investment in the Australian office market,” said Paul Roberts, head of institutional sales, Knight Frank. 

The strong outlook is reflected in the extent of capital raisings in recent months for office and industrial property and ongoing confidence in market fundamentals.

Mr Burston said “The recent run of capital raisings points to strong prospective demand from institutional investors to allocate to office and industrial property assets not withstanding slower economic growth.”

Knight Frank’s Chris Naughtin, Associate Director, Research &Consulting said capital growth in both the office and industrial sectors should pick up in 2020 and 2021 which will see total returns remain in double digital territory for the sixth consecutive year.

Mr Naughtin also believes industrial property will perform relatively well as demand for warehousing space continues to grow as a result of the rapid growth of e-commerce and logistics.

Commenting on the different office markets, Mr Naughtin said “Sydney and Melbourne have dominated occupational market performance in both the office and industrial sectors over the past five years, substantially out stripping Brisbane, Adelaide and Perth in terms of rental growth, capital growth and overall returns. In 2020, we expect to see the start of a shift to a more even pattern of growth moving forward.”

“The Brisbane, Perth and Adelaide office markets have each benefited from a sustained run of positive absorption which has lowered vacancy and exposed a shortage of prime stock even though overall vacancy remains elevated.

However, office vacancy in Melbourne is set to increase as a large wave of new office supply is coming to the CBD. Around 590,000 square metres of supply is set to be delivered to the Melbourne’s CBD, with a big focus around the Docklands and Western core.