Talking Property: The House View Q2 2026

(upbeat music) Hello and welcome to our quarterly Talking Property Series, The House View. Together, CBR is Australia and New Zealand CEO, Phil Roland and head of research, Simea Chopra, investigate what's next for the Australian property sector, the potential disruptors, emerging opportunities, and what's top of mind for the industry's major players. We hope you enjoy their conversation. Hello, I'm Phil Roland and it is great to be back with CBR's head of research, Simea Chopra for our second edition of The House View for 2026. We've brought this episode forward by a week because we've had so many inquiries about how the outlook for 2026 is evolving. A month or even a week is a long time in today's world and we've seen this play out in full color with the emergence of war in the Middle East, all the heightened geopolitical tensions that go with this and of course increased oil prices and rising interest rates in Australia. And for good measure, you can layer in the impact of AI. So all this certainly feels like a wall of change to get your head around. So we're gonna do our best to unpack what these dynamics mean for real estate in Australia. Simea reflecting in our last conversation, it's fair to say that the winders come out of our sales since the outset of the year, a bit of a buzz killer really. In the first quarter of the market was very active and we were talking about positive sentiment. Investors really to really lean into the cycle. We had increased levels of investment activity and now we're faced with this. Before we go into the detail on Simea, at a headline level, how do you make sense of all this? What are the things that you believe have the most long-term change and what are the things that you think, you know, whole true? Yeah, look, it reinforces in some ways a number of our calls early on in the year. Construction cost will be high. We thought it'll be high. I think it'll be higher than what we'd expected. I'd say in a supply will be a lot more constrained and that helps drive rent growth. But you know, if you look beyond that, unemployment is still really low in Australia and hiring activity, particularly with white color workforce has been pretty strong so far. We've got this really good sort of population growth tailwind in the country. The population is growing at about 250,000 people. Pre-COVID is about 160,000. So you've still got that big tailwind. And I think in this episode, we'll just reinforce Australia as a safe destination. You know, it was a top three destination for high net worth individuals prior to this. And I think we'll probably end up seeing more inflows into private wealth. And Phil, you and I were talking about this earlier that bond yields had already started to move in October and November. So in some ways, the markets were already priced for a higher rate environment. So there's some change to the outlook. But for anyone kind of looking, you know, over three years, five years, 10 years, sort of horizon, I think a lot of this is just noise. And it'll end up reinforcing the value of real estate. Yeah, well, it's really interesting, you say that, to me, because for me, it's a great reminder that we've been operating in a volatile and uncertain world for a long time now. And well, these events are really significant. And I don't want to make light of them. They are just current examples of how events create windows and cycles that are just so much shorter now. And of course, the implication being that you need to be realistic and responsive. And of course, alert to the opportunities that sit within these windows and cycles. But as equally important as that, your long-term strategy as your friend, right? You know, holding conviction to your long-term thinking is just so important in times like this to, you know, to your point to look through the noise, look through the uncertainty back to the fundamentals of your long-term thinking. So look on a lot of notes, Samir, how was your Easter break? And while we're on the top of a fuel, you know, did you travel? I feel I think that first quarter, most of us just needed to recharge, right? Like it was super busy as clients came back into the air with more urgency to transact. For the break, yeah, I finally got in a car and we went up to beautiful port Stephens. I must admit though, I was really nervous about the field situation in the lead up to the holidays. It's kind of COVID vibes, given some of the localized shortages. I love you've had jury cans in your boat. Thought about it. All right, well, it was good to have some government reassurances about fuel availability, a hit of the break, and some relief through the temporary cut and fuel exercise. But I know we're all keeping a watching brief on what continues to be an evolving situation around the price of fuel. Yeah. So you're going to fuel cam down by about 25 cents, but it's still about 30% higher than we were sitting in fab. And look, just before we started recording, you also mentioned to me that Australia's banks have been publishing some timely insights into how Australians have been spending their money during March and April. So they're looking at credit and debit card spend to help their clients and help the government navigate the current situation. It's a really good initiative from the banks. And the data seems to suggest that about an extra one and a half to 2% of the wallet is being spent on fuel. So this is out of your credit card spend, one and a half to 2% more is going towards fuel. And there's been some pairing back of spending on holiday accommodation and household items. It's a little bit hard though, filter desi for how much of this is because petrol prices have gone up compared to higher interest rates. You have two things in the mix. And Phil, you've probably also had a chance to meet a number of senior clients. What are they saying about the early impacts? Yeah, well, look, it's a fairly similar story. Most clients that I've met have said, they were very well set up for an active and constructive 2026 before obviously the moods out due to the conflict in the Middle East. And of course, the associated change in the industry trajectory. But I suppose what I would say is those clients were big exposures to residential and retail have certainly borne some of the early impact through reduced sales and visitations. And of course, all of our clients, regardless of sector, are very cognizant of the increasing challenges and creating future supply. So on that, why don't we dive into that one and more detail, Simeon? Yeah, I think, you know, on supply, Phil, the first thing is, you know, we're bracing for a material lift in construction costs. Just over 50% of the project development costs, for a typical project, are linked to energy prices. You know, both the raw materials that go into the construction and then you've got to kind of transfer these materials to the site and then operate the site. These are all linked to energy costs. So energy is super important. So raw materials like paint, cement, steel, bricks, and glass goes there all inherently very energy intensive. And likewise for plastic-based components like pipes, you know, I was looking at some steps here that I, for example, nearly half of the cost of manufacturing paint is oil. And 20 to 40% of the cost of manufacturing steel is energy-related. Yeah, so you know, this sharp increase in oil and gas prices, you know, at the construction costs. Actually, what I find interesting, Phil, if you look at construction costs over a longer time horizon, construction was growing at 1.5% per atom, pre-2019. So that's very manageable. It then started to grow at 6% per atom over the last five years. A lot of this was caused by supply chain pressures and the Russia-Ukraine conflict. And you know, the prices did not decline as oil prices came off in '23 and '25. So they stayed elevated and then continued to grow it around that sort of 4%, 5% sort of pacing. And I think that's the really important point here. Once construction costs inflates, it stays there and becomes the new base. Yeah, and other reasons why it sort of holds there. So what kind of construction costs price shock could we reasonably estimate? And when we also have to expect labor costs to inflate rapidly driven by, I suppose, the timelines and just the sheer scale of work that's associated with big programs like Orcas and the Brisbane Olympic. Yeah, Phil, look, I would brace for an 18% increase in construction cost, you know, the cost of 26 and 27. So 18% in total over that two-year period, that's a big number. And then we're assuming 4.5% per annum towards the end of the decade and into the 2030s. Big jump. That is a big jump over the next two years. But I suppose we've seen that before during '21 and '22 and the infrastructure work so shattered with, as I said, Orcas and Brisbane Olympics will play into a strong demand for that scarce construction workforce. And what's in the last quarter that one of our biggest productions is that supply will keep facing headwinds and we're possible investors and developers who start a construction early will be in better shape and deals where construction is starting later in the decade. Samaritan, is there any sense on how high construction costs and high bond yields will impact development? Well, we've done some initial modeling. You know, in our sense is that economic grants needed for projects that are completing later in the decade have risen by 68%. Put another way. Rents need to move above trend by 68%. Do offset this higher cost of construction and the higher bond yields. You know, and that's getting 68% higher rents in perpetuity. Do offset the shock during this development phase. OK. That's pretty compelling, right? And so just to play devil's advocate, then, Samaritan, does this mean that there are new developments being planned that could just stop completely? That's a tough one, Phil. Looking some locations where rents are already already shooting higher, like Brisbane as an example, a developer could still move forward with more conviction, and particularly for smaller developments. But a number of speculative developments that don't already have tenants in place, I think that's where we'll see postponement. And I expect, you know, we'll start the trim supply forecast for industrial and residential through the second half of this year. The hotel's office retail had already assumed, you know, very subdued outlook, 40 to 50% below the last 10 years, but I think this now spreads into industrial and residential. Yeah. And just as the market is focused on the impacts of higher interest rates and higher energy costs on demand, you know, fundamentals will continue to be shaped by these added supply side constraints. So, you know, you referred to this as Tina in our early 26 market outlook, you know, the current is no alternative as supply joint. But just shifting gears and focusing on the near term fundamentals, let's look at how rents travel through the first quarter of 26. Yeah, look in most markets, net effective rents have surprised positively in the first quarter. So, you know, if you look at prime office, you know, we saw strong net effective rent growth in Brisbane of, you know, about 13% year over year, like 13% rent growth year over year. So, it was 8% rent growth year over year. Both of those were much higher than I'd expected at the start of the year. You know, and Perth and Melbourne were sort of plus five and plus three percent. What we're seeing feel here is that, you know, incentives are starting to compress of their high levels of recent years. And this is for prime assets located in the CBD where there's a, I suppose, a bit of balance of power between landlords and tenants. What about industrial and retail? Yeah, it's a reasonably positive story for retail rents in regional shopping centers. So, Sydney and Perth rents, you know, are pacing at plus seven percent year over year. You know, Melbourne and Brisbane are plus three to plus five. These are all positive numbers and, you know, we're talking mid-single to high single digit growth. Retail is now, you know, slowly recapturing the grounded loss during those COVID lockdowns. Yeah, certainly an asset class that continues to carry five of our investors, both domestic and, again, and increasingly offshore. And retail, of course, benefits from the lack of new supply for shopping centers, you know, the vacancies below five percent. And there's always that tailwinds that you're always constructive on, severe of the growing population with higher wages. Yeah. So, you know, retail looking good, but out of all of the sectors, industrial is the one I think that deserves the most acute attention in the near term. You know, here we saw net effective rents decline by doing a half percent in both Sydney and Melbourne. And higher incentives have been the culprit here is going to new supply comes on the market and, you know, there's a search for tenants. On the flip side, Brisbane logistics or net effective rent growth of nearly nine percent and Perth was also strong at plus six. So industrial rate now is the most bifurcated market out of all of the sectors that we cover. Mm-hmm. Good, good. And just around it all off at Smear on the capital market side, we had a good first quarter. This was most evident in office and retail. And I should qualify the strength of office was concentrated in Sydney. But Smear interest rates have increased across all durations, the cash rate, three-year bonds and long-term bonds. How could this impact pricing? I know it's moving feast and most clients will look through short term interest rate cycles, but what do you view? We're keeping an eye on the three-year bonds right now Phil. That's most important in deal activity. Clients borrow for three years. They're kind of hedge it if needed. And these three bonds have increased by around 0.3 percent in the first quarter. But the credit spreads, which is a margin on top, has compressed slightly. So yes, there is some headwind where previously we were expecting around 10 percent growth in transaction volumes. I think now it might be closer to 5 percent growth in transaction volumes. And there could be some upward pressure on cap rates. And that'll be probably most pronounced in industrial and office. For now, we're penciling in, call it 10 to 15 basis points of cap rate expansion in office for this year, around 25 to 35 of expansion in industrial. And so 10 to 15 in shopping centers. That's taking a very sort of conservative view on pricing. Living sectors will probably be flat, maybe five bits of expansion. So just a more this move higher in 26, then kind of leveling out in early 27 and then we get back into compression from 2028. That's kind of how we're modeling it. Couple of with ranked growths that we just spoke about, the cap rate expansion could limit how prices move for prime assets. As we've been also in discussing investment cycles of becoming shorter in duration, that would know to buy and sell requires a lot more agility in decisions. Yeah. Right. I feel like fielded in this interesting call from a client, it was during one of those dark days of market volatility earlier this month. And we were chatting about cap rates. And he just reminded me that one should not capitalize on the downside. Basically, what he was saying is, just because earnings and valuation metrics are depressed or elevated at any one point in time does not mean that that's going to be the case in 62 months. It's just a reminder, you know, still at the market events, but also be sort of level headed. What you were seeing at the start about future scenarios. Yeah. Yeah. We're talking about being alert to events. Let's move our conversation to AI. To me, it wouldn't be an addition of this without covering that. And we've been proactively experimenting with AI tools across segments of our business. But when you meet with investors and tenants, there is clearly some uncertainty around the potential longer term impact on the type of space required in the future in an AI adopted world. It comes up in every meeting with clients, not just our first, but also the impact on income and jobs. And in a hence, the impact it could have on retail and residential. So yeah, most tropical. Yeah. Well, let's tackle these questions head on through what we're observing in the short term and then some views over the medium to long the term. You know, I love data. And one of the most important pieces of data that came out recently was on where are the jobs being created and lost in the most recent quarter in Australia. So it's really cool data. Much to my surprise, Phil, the sector with the highest growth in jobs was professional services. The professional services added 69,000 jobs in the last quarter. There's been a lot of chatter about how AI could impact legal firms, accounting firms, consulting jobs. So it's really fascinating to see that that sector posted a big and the biggest jobs growth level. And guess what? That sector is probably one of the most advanced around how they're adapting and embedding AI in their business models. And to be fair, a number of firms in the sector have active roles in advising on AI deployment, like you know, they're consulting firms. So it's a new growth practice, but you do raise an interesting point about it having the strongest growth of any sector. What about other types of white collar employment? Yeah, look, we saw financial services added 3,000 jobs in that quarter. Second media lost 10,000 jobs and public admin exited about 21,000 positions. You know, bring it all together. Just over 40,000 white collar jobs were added in the last quarter. And you know, that should provide some comfort around net absorption for office in the near term. It's also encouraging news for retail and residential, which rely on these high paying jobs. But you know, just taking a longer term, you feel the number of jobs in finance and professional services has grown from around 750,000 back in 1990 to 2 million currently, 750 to 2 million. And this is despite all the rapid technological changes, you know, all the business process outsourcing, you know, the disruption around the GFC and COVID. So yeah, roles have changed, but the number of jobs and the volume of office employed jobs has grown significantly. So, you know, I'm optimistic that this will continue. Yeah, I agree, Samir. Look, I'm sure this will pick up materially through the course of 20s to 26, particularly as organisations build greater clarity around their AI strategies. You know, the obvious implication is that over time tenants will want more flexibility in their leases to expand and contract. But equally, you know, that does bring a challenge with higher foot out costs, you know, the longer term lease terms allow both sides to upgrade and amortize the premium foot outs that are just so important in today's world. Yeah, look, and when we look at all this tech, our overarching belief is that, you know, access to power and energy is vital. And it's not just data centers, but also office, residential, industrial, healthcare and retail right across the spectrum. You know, as AI, electric cars, robotics, gain traction, real estate that is already sort of pre-provisioned with access to these higher power loads should do well. You know, there's some studies around field that suggest that the power needs increased by 2X to 3X for a warehouse using robots. Just like we've experienced this flight to quality, I think, you know, we could see premiums emerge for flight to power. Yeah, that's a good point. Well, to wrap it up, the recent oil price spike and prospect of more aggressive interest rate hikes could certainly impact transaction volumes and development activity. But this needs to be balanced with scope for further rent growth, as supply becomes increasingly challenged at a higher construction cost. looking at the coming quarter semi, any other material things that you think we should be mindful of. The final thing I'm just keeping an eye on is property related taxes. So you know, I'll be keeping a very close eye on the state budget cycle in Manjoon. That's I think hopefully the only last hurdle in 2026. Yeah, well, we'll see. As I say, a month is a short time. All right. Well, I think that wraps us up. Thank you, Samir and to our listeners, I hope you enjoyed this latest edition of the House View. As always, please send us any questions you might have via talking property at cvary.com and make sure to subscribe to Talking Property to ensure you don't miss any of our fortnightly talking property episodes. Until next time.