Talking Property: The House View Q3 2025

Hello and welcome to our quarterly Talking Property series, The House View. Together, CBRE's Australia and New Zealand CEO, Phil Rowland, and head of research, Samir 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 Rowland, and it is great to be back with CBRE's head of research, Samir Chopra, for our third edition of The House View for 2025. In this episode, we'll explore some of the current upsides and downsides for the Australian property sector amid this ongoing global upheaval we are experiencing. But we'll also cover some of the trends that we've been observing across the office, retail, industrial and residential sectors. We'll also examine why private credit is playing such a growing role in funding Australia's real estate and make sure to listen to the end when we'll be discussing some of the opportunities we're seeing around Australia's annual 100 billion infrastructure spend and the rapid growth that's occurring in the high net worth investor market. Alright, Samir, let's kick things off by looking at the macro picture. I was at the property council's property leaders summit last month, and the feedback from the various panels was that Australia continues to screen really well from an international perspective, particularly in terms of stability, given the very volatile environment that we have in the world right now. There was a particularly interesting session on demographics that reinforced the comparative advantages of Australia, which of course in turn underpins the fundamentals of our sector. One of these advantages is continued population growth, which is providing a strong tailwind for Australia's growth and prosperity. Now, you've always been constructive on this point, Samir, but of course population growth isn't a panacea. There are some clear and present obstacles for the property sector with taxation at the top of the list for investors, owners and developers. What's your take on this, Samir? So, yeah, look, Australia does screen well, but I'm going to do something unusual and start off by being bearish. You know, I do worry about the tinkering and the uncertainty with taxation. And Samir, just to be clear, you're talking about the changes around superannuation and family trust. Yeah, exactly. Look, I'm less worried about things like tariffs and interest rates, and more worried about the outlook for taxation of real estate. For me, you know, this uncertainty is the single biggest risk for owners and potential investors in the sector. You know, we can deal with investment cycles, but regulatory reset, you know, it can cause a more sort of permanent impairment of assets. Yeah, and there have definitely been a number of questions raised about the taxation of unrealised capital gains, both as a philosophical issue, but importantly, the basic investment issues that it creates. Yeah, that's right, Phil. This may play out sort of more prominently in the private client space, I think initially, you know, for instance, imagine you're a shop owner, you know, or a small food manufacturer who, you know, owns their own premises in their superannuation fund. Going forward, you may well need to start paying tax on capital values, even though you have no intention of selling the premises that you're using. Yeah, it's a deeply concerning piece of tax policy that comes at a time when the sector is already overly burdened, you know, with taxation, and there's an obvious productivity impact with having to value assets every quarter, but it's also an enormous, if not untenable cashflow burden that's ultimately going to see capital exit the sector. But putting that aside for a moment, the demand-side picture looks good. Samir, Australia's population grew by 446,000 in 2024, and while growth has slowed this year, it is still well above the long-term average. Perth and Brisbane have the fastest population growth as they benefit from overseas and interstate migration. Yep, spot on, you know, like the big picture is that there's one new Australian for every six back in 2014. You know, so over the near term, the population is expected to increase by almost two and a half million people filled between '22 and 2027, so this five-year period. That's akin to recreating Brisbane, you know, which is Australia's third largest city. And, you know, if you pause and think about all the real estate that is in Brisbane, all the homes, the shops, the logistics, the office, the hotels, the hospitals, the childcare, that is the level of new demand for real estate that's being created across Australia over this sort of five-year period. Yeah, look, our demographics are certainly an attraction for international investors. It's a picture that's very unique in the world. But it's not just about demographics. Ada Choi, CBERE's APAC research head, was recently in Australia, and she called out our relatively stable economic profile, our tight vacancy rates, particularly in logistics, and a rental growth outlook as factors that stand out for Australia. And, of course, Australia and the APAC region seems to be well-positioned for interest rate cuts. All right, so, Sumire, let's just switch gears for a second and talk about some market trends. CBERE's preliminary data is suggesting that year-to-date capital transaction activity has been pretty strong, particularly in retail and hotels. But with this backdrop of elevated uncertainty, we are seeing some, you know, leasing sentiments often a little. Let's go through what we're seeing on the ground. If I look in the office sector, you know, leasing volumes have been soft in the second quarter in most cities. Face rents are still growing, but leasing deal volumes were soft as we caught up with some of our national team members. That was kind of the number one thing that they were calling out. Well, and look, the global macro environment is clearly impacting sentiment, but there are some encouraging indicators. You know, we expect vacancy to tighten up and core markets over that 26, 27 period as supply falls away. And in markets like the US, there's been an encouraging trend over the past few quarters with some positive net absorption in many markets. Yeah, look in Melbourne office leasing has been one of the most sort of active participants in that second quarter. Some of this is, you know, due to the opportunity just for occupiers to upgrade because incentives are elevated right now. But, you know, I'd also call out that we'd like to see a shift away from professional services to more financial services and technology sector leasing deals, financial services companies in particular, you know, should be feeling more confident now in how their workforce is returning to office. And just on office rents, we're seeing annual face rent growth of four to five percent and, you know, incentives and core locations have been broadly stable this quarter. They had started to compress, but now they're sort of more stable into this quarter. And from a transaction standpoint, our office capital transactions teams have had a very busy quarter as the bid ask bread starts to narrow. So broadly speaking, it was around 100 bips in 2023 and currently sits at about 25 to 50 bips. There also seems to be renewed appetite from potential sellers to bring stock to market. And we're seeing this especially in Brisbane and Perth. So, Samir, where are cap rates sitting? Speaking with our valuations and capital markets teams, cap rates were stable in office during the second quarter for CBD locations. We're still seeing some slight expansion in the metro and fringe markets because there's not enough sort of deal evidence there. But, you know, I'd say in CBD, Grade A cap rates now are about low six percent in Sydney. They're in the early seven, maybe seven and a half in Melbourne and seven and a half to eight percent in Brisbane and Perth. OK, well, let's move to industrial where leasing activity is showing some signs of picking up after a slowdown over the past two years. Yeah, you know, we're expecting a reasonable pick up in vacancy during the first half as new supply hit the market and take up was still playing catch up. But, you know, actually the incremental growth in vacancy is maybe not as much as we'd expected. It's still sitting below three percent. Yeah, yeah. And look, that would be characterised as tight by any global standards and in many North Asian markets, industrial vacancies sitting at double digits. Yeah, part of the reason here, Phil, is, you know, we're still seeing issues in getting supply into the market in a timely manner. There have been a few delays in projects which have kind of helped keep a lid on on vacancy. You know, in logistics, face rents are growing slowly in the kind of low single digits, but there's been a slight creep up in incentives. Let's say incentives are up two to three percent over the quarter. But this is something we discussed in our last podcast and it's coming to fruition. So net effective rent growth across most markets will be flat-ish through 2025 in my view. The positive story in industrial seems to be in cap rates. You know, in Sydney, super prime cap rates have now declined from 5.33 percent to 5.25 percent. So capital values should hold up maybe even go up a little bit during a period of flat-ish rent growth. Yeah, that's encouraging. Well, two other sectors that were seen strong recovery and recouped pre-COVID occupancy levels in some cities, hotels and student accommodation. Yeah, look at data showing that international student arrivals in the year-to-date to April was tracking plus 12 percent compared to last year. It's a lot more resilient than what we'd expected for 2025. But you know, let's wait and see how it tracks over the second semester. Yeah, okay. And international tourists are benefiting from new flight routes. I think they're now 60 new flights per week from destinations in Asia, Middle East and New Zealand. Of course, this has helped lift Brisbane and Perth occupancy to well above 2019 levels. And the flip side on that one, Phil is also in a hotel supply, particularly in Sydney remains very challenged. And so we're expecting, you know, five and a half percent revenue per available room, so basically a revenue growth rate in 2025. And you know, more generally in Australia, around 60 percent of new supply is now skewed towards the premium end. And you know, that should support room rates over time. Right. And look, I suppose tied to that, the segment of the market comprising ultra luxury lodges has seen room rates increased by 60 percent over the past five years. The missing ingredient in hotels has been the return of tourists from Hong Kong and China. This segment is still about one-third down from pre-COVID levels, so a bit of room to move there. But as they return, it should help boost CBD retail. Yep. And you know, just talking about retail, by the way, one of my key learnings from Ada's recent trip to Australia was around the phenomena of LeBouboudolls. You know, retail is such just a fascinating sector with new trends in at leisure, cosmetics, frozen yogurts, and now, you know, filled dolls as handbag accessories. Yeah, let's put that one on the Christmas list. All right. And in retail, there has been strong interest from both private and institutional investors in the last two years. And like as a sector, valuations for shopping centres has held up well during this interest rate expansion cycle. And you'd expect retail to benefit from consumer spending as interest rates fall. You're betting me, Phil. Don't get me started on interest rates. You know, I still expect there'll be another six cuts to go in this cycle. I expect we'll need to see, you know, mortgage rates that are well below four and a half percent before the consumer really starts to make a meaningful contribution to economic growth. Yep. Well, let's see where we land. All right. So talking about interest rates, you recently did a deep dive on private credit to me. That is definitely a part of the real estate market, which has seen exceptional growth and continues to attract interest from our institutional clients. Yep. Private credit is a really exciting part of the investment universe. We forecast that the size of the Australian real estate private credit universe will grow from about 50 billion currently to 90 billion by 2029. And just to sort of put this in context, you know, the whole of Australia's real estate sector is worth 12.3 trillion and debt finance for real estate is around 2.8 trillion and that includes, you know, mortgages on home. So contextually, you know, Australia real estate sector as a whole only has a gear ring ratio of about 20 percent. It's very lowly geared. So how does private credit fit into the real estate picture and why are institutions attracted to it? You were saying that there are around 15 to 20 institutions that are very active managers and there's also a significant pool of capital. A full look by segment, private credit penetration of real estate debt is just 0.3 percent of residential mortgage. This is a segment that's typically been dominated by the major banks. Private credit's penetration of residential development is about 26 percent, so about one in four. And it's about 4.2 percent of commercial asset debt, like so on offices and logistics and retail. So it's still early days. Yeah, all right. So two large markets where we see private credit active is certainly in residential development and also to support commercial assets. Yeah, and boroughs typically access private credit to get flexible terms. You know, you might want a higher loan value ratio or because you might be looking to acquire an asset that still needs DA approval to kind of realize its full potential. Or maybe you've just bought something and you need bridge finance. You know, and typically these loans come with shorter maturity but with higher interest rates. So if you're an investor in a private credit fund, it provides an opportunity to get returns which could be 3 to 5 percent higher than your normal sort of term deposits but with a different risk setting. Yeah, and if you think about market timing with capital values and the interest rate trajectory, you know, what are the factors that one should think about when allocating capital? If I look, I would say, you know, that as construction cost risk becomes less of an issue, like it's a known known right now. And you know, likewise as interest rates start to come down, these will become less of a risk issue for investors in private credit. One of the bigger risks, you know, or better expressed as a hindrance to returns is facility utilization. It's a bit technical, but as most loans, you know, in private credit have a short duration, private credit lenders need to constantly source new opportunities to lend. And if there are periods when the lending book is not fully utilized, then you know, you have lower returns. Yeah. Well, private credit definitely saw strong interest in our Global Investor Intention Survey, where it sat third place alongside segments such as data centers and senior living. All right, so just changing direction for a second, the residential market seems to be showing some signs of life, picking up after the recent interest rate cuts. Auction clearance rates have settled above 70% and even days on market for apartment rentals are reducing to around three days from 21 to 18 days. So how might this play out over the next few quarters, Samir? I'm going to go out a little bit more on a limb here, Phil. I think buyers and renters might be caught out just by the extent of price movement over the next 12 to 18 months. You know, most teams out there are forecasting mid-single-digit growth in price and sort of lowered a mid-single-digit growth in rents for residential. I would suggest that price growth could well be in the double digits and rents may be up in the high single digits as we travel through 2026. You know, just the elevated and growing costs of bringing, you know, new apartments, new houses to the market are the real kind of drivers behind this. And how do you see this sort of interplay with housing affordability? You know, interest rates are helpful, but there's a limit to this, you know, when affordability comes into the question. Yeah, Phil, look, our maths is that each one percent cut in interest rates provides an 11% boost to affordability. You know, so if interest rates come down by say one and a half to two percent over the current cycle, then, you know, that removes 15 to 20% of the affordability issue. We think interest rates give two-thirds of the affordability relief and the other one-third of the affordability comes through just income growth. People's getting, you know, paid more. Yeah. All right, well, no doubt I have to do a pulse check on that one next quarter, Samir. So, now, Rizi is just one of the sectors set to benefit from Australia's booming infrastructure spend, which is now circa a hundred billion a year, double what it was a decade ago. But the other sector that benefits from all this infrastructure development is logistics. Yeah, look, logistics and apartments are likely to be the two largest beneficiaries of all this infrastructure investment in Australia. You know, our own very detailed scans show that airport, rail and road transport account for the majority of the recent large investments being put in by government. Yeah, well, like Sidney Metro, Melbourne Metro, we've got the Brisbane Cross River Rail, Perth Metro Net, and the Canberra Light Rail, all set to provide new opportunities for high density apartments and faster commutes for CBD and, of course, fringe office workers. And then, you know, you can add on initiatives like WestConnex, Melbourne's Westgate Tunnel, Adelaide's North-South Connector, you've got the Kumra Connector, then you've got the Western Sidney Airport, all of these, you know, collectively just going to massively move the dial on logistics efficiency. And while we're constructive on opportunities, I'd say on the flip side is that we've seen a number of project delays. And, of course, you know, governments also imposed a lot of developer levies to try and recoup some of the costs of rolling out this new infrastructure. Yes, yeah, additional burdens. So, to me, just to finish off, one of the more resilient parts of the investment universe has been the private and high net worth segment. We know they can be counter cyclical and invest when institutions are on the sidelines. So, there are a very important source of liquidity in the market. Yeah, Phil, look, there's about 2,000 family offices in Australia, and, you know, most will have some exposure to real estate. And just to kind of provide a sense of the depth in the market, Phil, you know, the Australian Financial Review noted that there's actually about 161 billionaires in Australia. I'm just amazed at that. And while family offices frequently outsource some of their share investing, both domestic and international share investing decisions, they tend to take a more hands-on approach to real estate, you know, and to private credit and private equity. And in many cases, you know, real estate makes up about a quarter of their wealth. Yeah. Yeah, and globally, family offices, of course, are very attuned to geopolitical and regulatory risk. I think it was a recent Deloitte survey, this risk ranked higher than succession planning and family disputes, you know, within these family offices. So, the relative safety of Australian regulatory environment, the stable economy, and investment markets is going to continue to be a drawcard for local and Asian family offices. Well, I think that's a wrap. Thank you, Samir, and thank you to our listeners. I hope you enjoyed this latest edition of the House View. As always, you can send us your feedback and any questions that you might have via [email protected]. We will be back with the House View and Q4, so make sure to subscribe to Talking Property so that you don't miss that one or any of the fortnightly Talking Property episodes with our wonderful Catherine House. Until next time.