The following is a snapshot of the API’s NSW Property Market Outlook held at the Wentworth Sofitel Sydney. As part of the process Wills Property has incorporated their key take aways and house views.
Australia – Economic Data
Inflation is slowing and looking at latest results quickly heading toward the RBAs preferred band.
The RBA remains cautious as cyclically inflation remains well above the long-term average.
That being noted the general market is forecasting a rate cut in Oct 2024. Interestingly the derivates market has factored in two rate cuts in 2024, May & Oct with a third cut in Feb 2025.
In terms of GDP Australia is the shining light in terms or developed countries sitting at 2.5% for 2024.
Population is set to increase by 1.3%.
Unemployment is forecast to increase to 4.25%.
Construction cost increases are moderating. Costs up 1.9% to the Dec 23 quarter. This could be a ceiling.
KEY TAKE AWAY – The Australian economy will be a standout in 2024. The economy is likely to be within the top two performing developed nations.
Office Sector
There is a liquidity drought in the office sector. Sales volumes are down 65% when compared to 2023.
Office values have dropped by 10% from their peak, so far. They are forecast this downward trajectory. In the previous downturn office values dropped by 17%, the market could well be positioned to go further than this.
Vacancy in the Sydney CBD is running at 12%.
Prime yields are 5.75%.
Rental growth rates are sitting at 5.5%.
Incentives are sitting around the 30% mark.
Vacancy is expected to increase with additional stock being delivered to the market.
KEY TAKE AWAY – The sector is current lost in the woods. We have not seen full valuations wash through the sector, in particular the A-REIT market.
It is our view that with property analysis and pricing the office sector could be a good counter cyclical play for Private Investors and Syndicates over the ensuing 6 to 12 months.
Retail Sector
There is currently a shift marketing underway from retail tenants. The ‘old’ methods of retailing are being replaced be the creation of customer experience. Consequently, tenants are expanding store networks, upgrading stores and entering new markets.
Online spend may have stabilised taking 13-15% of the retail spend.
There is limited supply in retail over 2024.
In terms of prime retail yields in Sydney are sitting around the 4.75% mark. We will see some further softening of cap rates.
Vacancy is sitting around 8%.
Rental growth will be low single digits.
KEY TAKE AWAY – Headwinds are forecast for Large Format Retail with yields in excess of 6%. This may lead owners to look at alternate uses.
Evolution of users underway. “Connection with brands” will drive dealings in the space over the ensuring 12 to 24 months.
Industrial Sector
Industrial remains the shining light of the commercial sector. $1.2 trillion worth of goods flowed through industrial assets in Australia in 2023. This is forecast to increase.
There is a scarcity of industrial land in Sydney. The largest portion of industrial land is in Western Sydney comprising some 2,000 hectares.
Construction costs have restricted development. “Built form is king.”
Yields for the sector are sitting at circa 5% and whilst a correction is forecast the low vacancy rate and rental growth forecast offset cap rate movement.
The vacancy rate is sitting at around 1.5%.
Rental growth is forecast to be around 4%.
KEY TAKE AWAY – It is likely that as cap rates soften in the sector institutional investors will divest of quality assets. These assets will present excellent long-term investment. We are likely to see sophisticated Private Investors step into this sector over 2024.
Residential Sector
Residential sector has been heavily impacted by increasing population and interest rates.
Population levels increased by 675,000 over 2023. This is the largest influx of immigrants since the 1950’s. This figure is forecast to drop to 375,000 for 2024 and 250,000 for 2025.
The population rise has directly impacted accommodation levels and rents. The vacancy rate for Sydney remains around 1%. Accordingly rents increased. To Dec 23 rents increased by 9.7% over the calendar year.
Rents are forecast to increase by low to mid single digits over 2024. Our view is that rents are more likely to increase by 6-8% over 2024.
We have seen 13 consecutive interest rate increases as the RBA has attempted to tame inflation. The current cash rate sits at 4.35% with variable rates ~6.50%.
Cuts are likely for the middle and back end of 2024. The last time we saw a cut was November 2020. They are likely to be in the order of 0.25 to 0.50%.
Whilst mortgagee in possession valuations have increased by 8% over the last 12 months, we have not witnessed foreclosures and an increase in the stock to market. Mortgage stress is more pronounced to Western Sydney areas.
Sydney transaction volumes are well down when compared to 5 year averages. This is directly impacting pricing to the upside in the supply demand matrix.
Values over 2023 surprised to the upside, increasing by 11.4%. Forecast increases in value for 2024 vary:
KEY TAKE AWAYS –
- Rental crisis will continue – no respite for tenants over 2024.
- Investors are back off the back of increasing rents and capital growth outlook.
- With limited stock and likely improving market momentum, off the back of forecast rate cuts, housing values will increase over 2024. We are bullish. We are forecasting house prices to increase between 7-9%.
- Construction costs remaining a bugbear – properties that are ‘turn key’ are attracting a premium. Commensurately ‘renovator delights’ are selling at discounts – This is an opportunity for the ‘skilled’ purchaser.
Wills Property boutique real estate agency focused on service. The business has been offering and delivering a highly professional services for over 90 years.
The company uses the best of the past combined with the leading insights of the present to deliver outperformance. With over nine decades of operating experience there is no better firm to assist you with your property needs.
For help with your property requirements call –
John Wills FAPI CPV JP
Principal
WILLS PROPERTY
0467 44 38 38
