Investor activity is expected to pick up in 2023 despite interest rates. Image: Canva.
  • Demand for specialised products picks up
  • Hospitality to recover and bounce back with a green and luxurious twist
  • Sustainability changes from nice to have to priority

Earlier this week, we looked at the trends we expect for Australia’s residential property market in 2023.

Property expert Lloyd Edge reminded Australian home buyers to keep in mind the housing downturn won’t hit every city the same way.

Interest rates are expected to continue climbing, with some pundits expecting up to three more rate rises, with the highest cash rate expected to be around 4%.

Sydney is expected to have the biggest peak-to-trough declines, and refinancing on the rise.

Five trends to watch out for in Australia’s property market in 2023 included shorter and less severe downturns, according to Domain.

  1. Downturns tend to be shorter and less severe
  2. A fragmented property market creates upgrade opportunities
  3. Interest rates are one of the many factors to influence price
  4. An immigration surge will boost housing demand
  5. A price premium for the right neighbourhood

Commercial investment to rebound

Property investment is tipped to bounce back next year, with one of the drivers including clearer outlooks for interest rates, according to Savills Australia’s 2023 Spotlight research report.

According to the report, transactional activity has been limited at the close of 2022 with greater uncertainty around the economic outlook causing a widening in the Bid-Ask spread between purchaser and vendor.

“Some investors will continue to wait for the impact of higher interest rates to wash through valuations, but low leverage among major investors means higher interest rates pose limited systemic risks to the commercial property sector,” said Katy Dean, National Head of Research, Savills Australia.

Current average GFC Peak
LVR ~35% 60%-65%

Source: Savills Research.

REIT balance sheets were strong, the report noted leveraging was at an all time low.

Falling bond yields in 2023 will ease the pressure on property yields with the potential to limit further widening. However, Savills cautions that movements in yields could diverge significantly by individual asset depending on sector, quality, location, and lease length. Declining market interest rates could also help to facilitate a rebound in investment through reduced funding costs, and lower future returns on alternative fixed income investments.

“Australia is often seen as a safe haven for offshore investors and will retain its appeal with a robust economic growth outlook and high yields compared to many major markets, coupled with the weaker Australian dollar giving us a firm value advantage,” said Ms Dean.

Savills’ Katy Dean. Image: Supplied.

American and Singaporean investors were major players in Australia’s markets, the two countries accounted for 60% of offshore investment volume in the September 2022 quarter and 54% over the year to September 2022. The report forecasts American and Singaporean investors will remain active next year.

  1. Demand for specialised products picks up,
  2. Hospitality recovery continues due to pent-up demand, and
  3. Sustainability moves from preferred to pivotal.

Demand for industrial property continues

Logistics and data centres are expected to be the apple of investors’ eyes in 2023, with sector tailwinds to continue blowing on the market and demand growing following recent cyber-related events.

While industrial and logistics stock remains low, and stock coming online is still taking time, rents for both prime and secondary markets are expected to continue rising in the short term, according to Savills.

Recent high-profile cyber-crime events and a growing appetite for data storage and cloud computing are what Savills’ report believes will drive demand for data centres in 2023.

Focus on growth in targeted residential products in 2023 may also be on investors’ minds. The Savills report said the recovery of international student enrollments, strong occupancy and outperformance in rental growth will be factors playing on the minds of investors of student accommodation.

Build-to-rent (BTR) is another sector likely to see continual growth with several factors fueling the demand, including record-low availability, projections for smaller households, and increasing immigration.

It has the potential to also deliver game-changing numbers of rentals to market, with one Melbourne project delivering circa two-thirds more rentals into the market with just one building.

Hotels recover

This year has seen almost 3,500 rooms added to Australian shores across 10 major markets, according to Colliers. The 3,420 figure is a “moderation” from the more than 5,000 that opened in 2021.

“By remaining leaner until international tourism rebounds to pre pandemic levels, hoteliers are better equipped to navigate trading market fluctuations for resiliency post pandemic,” said to Karen Wales, Colliers’ Asia Pacific Director of Hotels.

According to Colliers analysis of the Australian Government overseas arrivals and departures data, short term visitor arrivals into Australia totaled 2.1 million over the nine months to September 2022 – 31% of the arrivals recorded for the same period in 2019.  However, international arrival numbers consistently improved throughout the year, highlighting the opportunity for future growth.

“As global travel reverts to pre pandemic levels, allowing for the fact that foreign travellers typically journey down under with a six month booking window and the cost of flights have yet to stabilise, the continued reinvigoration of Australia’s hotel industry will elevate the already renowned national brand.” Ms Wales said.

Melbourne has led the nation for new hotel openings for a second year, adding 1,421 rooms in the city, and 462 new rooms across the broader metropolitan area by the end of 2022, according to Colliers.

Additional room supply across Brisbane (51 rooms), Canberra (45 rooms), Gold Coast (702 rooms), Sydney (424 rooms) and Sydney Metro (315 rooms) will also uplift a hotel market which was predominantly built in the 1980s.

“This year and next year in particular will also see the elevation of luxury hotel standards in Australia, with the opening of eight new premium projects, including the Langham on the Gold Coast, the Ritz Carlton and Le Meridien in Melbourne and Capella and W in Sydney.” Ms Wales said.

“These hotels will set new luxury benchmarks in Australia and are expected to achieve a significant Average Daily Rate premium compared to rates already being achieved in these markets, similar to the experience of Brisbane and Perth.

“The future is also ‘green’ with demand for sustainable hotels growing amongst corporate clients and those travelling for Meetings, Incentives, Conferences and Exhibitions (MICE), who wish to align with businesses who share their social responsibility goals.

“An emphasis on sustainability will also increase due to new government policy driving change in this regard and financial incentives such as Green Financing and Grants, which now exist to encourage developers to pursue ESG certifications for their developments.”

The opportunity for a luxury green facelift is being leveraged by the Australian hotel market’s expansionary development phase, which is set to peak in the next 12 months with the opening of 5,949 rooms, according to Colliers’ research. There is a total of 12,517 rooms currently under construction and scheduled to open over the next three years.

Green demand grows

Hotels aren’t the only industry looking for greener pastures, sustainable demands have intensified among investors, according to Savills.

Big data and analytics will be key to realise the green premium, with:

“The green agenda [remaining a growing priority for corporate occupiers seeking to meet their own net zero commitments.”

Savills

The property industry is “electrified by the road to net zero”, with most efforts currently in the electrification space.

Other factors include transporting goods to and from sites sustainably, major Sydney projects are currently employing sustainable diesel in trucks delivering materials.

Investors and tenants looking for greener credentials was also a trend noted in Raine and Horne’s report.



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