However, analysts warn that a deferral of interest rate cuts could significantly impact the unlisted property sector’s recovery trajectory.
According to MSCI’s vice president of MSCI Research, Benjamin Martin-Henry, while the market may be approaching the end of the current cycle, the sector remains vulnerable to global uncertainties and is not immune to geopolitical risks.
“I do think that – [it] appears that we are getting close to the bottom of the current cycle,” he told InvestorDaily, highlighting positive capital growth for both the industrial and retail property sectors as an early signal of a potential rebound in 2025.
Although the office sector continues to experience negative capital growth, Martin-Henry noted significant improvements compared to Q2 results, reinforcing the view that the downturn may be stabilising across all sectors.
Centuria’s head of funds management, Jesse Curtis, similarly expects interest rate cuts to boost the number of transactions in the unlisted commercial real estate.
“We are optimistic that conditions for the unlisted commercial property market will improve during the 2025 calendar year. More specifically, we anticipate the volume of transactions to increase now that rate rises are more unlikely and the prospect of rate cuts are on the horizon,” he said.
Curtis also noted a narrowing gap between vendor and purchaser price expectations, signalling a favourable environment for increased transactions.
“This is a positive sign for more transactions in the New Year, and we anticipate property values to recover,” he said. “Rate cuts will also decrease debt expenditure for funds, which would, in turn, improve the likelihood of larger distributions.”
Office sector
The head of MSCI Research highlighted the MSCI/Mercer Australia Core Wholesale Monthly Property Fund Index, which tracks the performance of unlisted wholesale property funds, noting that office funds saw a write down of 3 per cent in Q3, bringing the total decline to 26.9 per cent.
Martin-Henry explained that while the work from home trend continues to impact office values, the primary driver has been the rise in the cost of debt which has been impacting all property types.
“Although further losses are hardly welcome news, it is encouraging that the pace of decline is slowing, with this quarter’s result showing a marked improvement on the 8.7 per cent recorded in Q2 2024,” he said.
Martin-Henry noted that one fund in the index delivered both a positive total return and capital growth for the quarter, indicating that segments of the market are beginning to recover, breaking away from the uniform declines observed over the past few years.
“Despite ongoing global uncertainties, the outlook for the office sector over the next 12 months appears more positive than the last,” he said.
According to Curtis, domestic office assets that have transacted recently have done so at their book value or close to their book value, indicating that office asset values may be stabilising.
He also expects further medium-term tailwinds on the horizon, such as return to office mandates from large corporations and the government.
“We are already seeing an increase in public transport trips across major east coast capital cities, indicating more workers are returning to the office so office demand and usage is increasing,” he said.
Headwinds
But while sentiment towards unlisted commercial property assets is expected to improve in 2025, the sector will continue to face challenges from global uncertainty, including potential policy shifts under the incoming Trump administration.
The head of MSCI Research anticipates some of Trump’s policies to be inflationary, though the full impact is “still up for a debate”.
“I have noticed that more and more forecasters are pushing up their interest rate cut forecasts and, unfortunately, interest rates are one big determining factor on the condition of real estate and the cost of debt is still quite high,” he said.
“If inflation remains sticky or even if inflation increases again then it will be hard for the RBA to cut rates and that has a significant impact on the costs of property which means there is a significant impact on the amount people can pay to buy commercial assets,” he added.
