The Australian property market continues to evolve, shaped by global shifts and domestic challenges. The 59th Kiparra Day delivered crucial predictions, highlighting where the biggest opportunities for investment may lie in the months ahead.
Global Outlook: Will the US Recession Hit Australia?
There’s a 50% chance the U.S. will enter a recession in the next 12-18 months, with AMP tipping a Trump victory in the 2024 elections. If so, we could see a return to trade tensions similar to the 2017 tariff wars. But Australia’s economy has become less dependent on the U.S., and more influenced by China’s “messy” two-speed economy. While property is down in China, its booming export market is benefiting Australia’s resources sector.
Domestically, Australia’s inflation sits at 3.8%, and interest rates have likely peaked. A rate cut is forecast for early 2025, with AMP expecting the cash rate to drop to 3.6%. Meanwhile, 30% of global central banks have already cut rates, suggesting a global trend that could eventually favor Australia.
Residential Property: Rising Prices, Falling Affordability
Australia’s residential property market has seen significant growth, especially in Perth, Brisbane, and Adelaide. The Home Value Index is up 13.5% year-to-date, continuing 18 months of upward momentum since the January 2023 trough. Experts expect a further 7% increase in property prices. However, affordability remains a significant hurdle for first-home buyers, with the average time to save a 20% deposit now at 11 years.
Immigration is fueling demand, with 550,000 new arrivals in 2024, half of them students. Yet, Australia only builds 160,000 houses annually, far short of the 240,000 required. Planning approvals are falling, especially in Queensland and NSW, compounding the housing shortfall. Rents have increased 8% year-on-year but are expected to slow with easing immigration. Nonetheless, rental growth will remain a concern for both tenants and investors.
Commercial Property: Population Growth Drives Demand
Australia’s rising population is driving demand across the commercial property sector. For every additional million residents, the country needs 420,000 apartments, 11,500 hotel rooms, 3,300 hospital beds, and 800,000 sqm of retail and office space. Logistics continues to be a standout performer, with vacancy rates at just 2%, far below the long-term average of 5%, and supply forecasts down by 40%. This makes industrial property one of the top investment choices, favored by lenders.
Cap rates in prime commercial assets also show strong potential:
- Industrial: 5.60% to 6.25%
- Office: 6.00% to 7.27%
- Retail: 5.53% to 6.00%
- Hotels: 5.25% to 6.00%
- Residential Build-to-Rent (BtR): 4.15% to 4.50%
- Student Accommodation: 5.25% to 5.75%
While office vacancy rates remain high (11% to 18%), the expectation is for a return to the office, with normalization by 2025. Retail vacancy rates sit between 8% and 25%, with no new supply in sight, hinting at potential future demand.
Development: Costs and Challenges
Developing new properties has become 30-40% more expensive, raising questions about the viability of new projects. This opens up potential opportunities in legacy stock—properties that may not require extensive new development but could offer strong returns with strategic upgrades or repurposing.
The Road Ahead: Investment Opportunities
Several key takeaways from Kiparra Day highlight where smart investments could lie:
- Industrial and logistics: Low vacancy rates and falling supply make this sector a clear favorite for long-term gains. The multiplier effect of population growth continues to fuel demand for logistics space.
- Residential Build-to-Rent (BtR): With ongoing supply shortages and steady immigration, BtR projects could offer solid returns, particularly in undersupplied cities like Perth, Brisbane, and Adelaide. The imbalance between housing supply and demand will persist for years, creating a strong case for continued residential investment.
- Student accommodation: Given the surge in overseas students and a 5.25% to 5.75% cap rate, this niche sector presents another attractive opportunity, especially in cities with major universities.
- Legacy commercial stock: With the cost of new developments soaring, investing in existing commercial properties with value-add potential may offer a cheaper route to strong returns, particularly as demand stabilizes in the office and retail sectors.
In a market facing affordability challenges, rising rents, and global uncertainty, savvy investors should look to sectors with strong demand fundamentals and limited supply. While interest rates may not drop significantly until 2025, the long-term outlook for residential and industrial properties remains highly favorable due to Australia’s population growth and ongoing supply constraints.
The next few years may prove to be a prime opportunity for strategic investments in Australia's property market—particularly for those focusing on the supply-demand imbalance in housing and the growing needs of the industrial and logistics sectors.