Data centers and rental housing emerge as leading choices for commercial property investment in 2024, according to insights shared by top real estate investment bankers. In a virtual roundtable hosted by The Australian Financial Review, experts discussed the ongoing challenges posed by high-interest rates and the quest for inflation-beating returns.
With rates relief not anticipated until the latter half of the year, traditional commercial property staples such as office and retail spaces face further pressure. This intensifies the search for rental growth capable of outpacing inflation, leading investors into previously considered niche areas, as highlighted by a panel of four prominent property bankers.
Ben Connolly, Managing Director and Head of Real Estate at Citi Australia & New Zealand, emphasized the robust growth outlooks of data centers and various residential sub-sectors, including manufactured housing, seniors living, student accommodation, and build-to-sell/rent. These sectors are anticipated to be preferred choices for investors in 2024.
Manufactured housing, often referred to as land lease, involves residents purchasing pre-fabricated homes and paying ground rent for a site. This emerging sector, along with other accommodation forms, is poised to benefit from strong demand as Australia navigates an anticipated housing shortfall. The roundtable also favored self-storage and logistics facilities, which continue to command substantial rental growth.
Veteran banker Tim Church, Co-head of Investment Banking at Morgan Stanley Australia, noted the attractive value proposition of real estate investment trusts (REITs) after nearly two years of turmoil. He highlighted the oversold nature of bombed-out REITs, particularly in consideration of the proximity to or achievement of peak interest rates.
The REIT sector had shown signs of recovery in the final months of the previous year, with yields on long-dated bonds – a key determinant of value – easing lower. The slow-moving devaluation of commercial property assets is expected to continue into 2024, particularly impacting office towers as weak demand and hybrid work arrangements create uncertainty. Colliers forecasted a potential 10-15% further decline in office tower values, resulting in a total loss of 25% peak-to-trough.
Ben Boyd, Managing Director and Head of Real Estate at MA Moelis Australia, anticipated further increases in capitalization rates (cap rates), industry shorthand for assessing value, putting pressure on values. Boyd emphasized that the movement of interest rates in 2024 would be a key factor influencing cap rates.
The bankers recognized the historic shifts in Australia’s capital markets, driven by the growth of private capital, both equity and credit. Mitchell Schauer, Managing Director and Head of Real Estate Investment Banking at Jarden, highlighted the impact of private capital on Australia’s capital markets. He noted that while long-duration private capital is suited for developing and owning commercial real estate, the efficiency of public markets in liquidity, transparency, and equity raising is essential for well-functioning economies.
The dynamics between private and public capital strengths and constraints may lead to increased mergers and acquisitions in 2024, as the pressure on REITs and the influence of private capital shape the landscape. Corporate activity is expected to be more elevated as interest rates peak, and prices struggle to recover, according to Tim Church of Morgan Stanley.
