However, analysts warn that a delay in interest rate cuts could have a significant impact on the recovery trajectory of the unlisted property sector.
According to Benjamin Martin-Henry, vice president of MSCI Research at MSCI, even as the market nears the end of the current cycle, the sector remains vulnerable to global uncertainties and is not immune to geopolitical risks.
Although the office sector continues to experience negative capital growth, Martin-Henry noted significant improvements from the second quarter results, reinforcing the view that the slowdown may be stabilizing across all sectors.
Centuria’s head of fund management, Jesse Curtis, also expects interest rate cuts to increase the number of transactions in unlisted commercial property.
“We are optimistic that unlisted commercial real estate market conditions will improve during calendar year 2025. Specifically, we expect transaction volume to increase now that rate hikes are more unlikely and the prospect of rate cuts looms on the horizon,” he said.
Curtis also noted a narrowing gap between sellers’ and buyers’ price expectations, signaling a favorable environment for increased transactions.
“This is a positive sign for more transactions in the new year, and we expect property values to recover,” he said. “Rate cuts will also reduce debt expenses 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 3 percent depreciation in the third quarter, bringing the total decline to 26.9 percent. hundred.
Martin-Henry explained that while the work-from-home trend continues to impact office values, the main driver has been the rising cost of debt, which has impacted all property types .
“While further losses are not good news, it is encouraging to see that the pace of decline is slowing, with this quarter’s result showing a marked improvement from the 8.7 percent recorded in the second quarter of 2024,” he said. he declared.
Martin-Henry noted that one fund in the index generated both positive total return and capital growth for the quarter, indicating that some segments of the market are beginning to recover, breaking away from the uniform declines seen over the last few years.
“Despite ongoing global uncertainties, the outlook for the office sector over the next 12 months appears more positive than previous ones,” he said.
According to Curtis, domestic office assets that have transacted recently have done so at or near book value, indicating that the value of office assets may be stabilizing.
He also expects other medium-term tailwinds, such as a return to big business and government mandates.
“We are already seeing an increase in public transport travel in major capital cities on the east coast, indicating that more workers are returning to the office, leading to an increase in demand and use of offices,” he said. he declared.
Headwinds
But even though confidence in unlisted commercial real estate assets is expected to improve in 2025, the sector will continue to face challenges from global uncertainty, including possible policy changes under the new Trump administration .
The head of MSCI Research expects some of Trump’s policies to be inflationary, although their overall impact is “still up for debate.”
“I’ve noticed more and more forecasters are increasing their forecasts for interest rate declines and unfortunately interest rates are a huge determining factor in the state of real estate and the cost of debt is still quite high,” he said.
“If inflation remains stable or even if inflation rises again, then it will be difficult for the RBA to cut rates and this will have a significant impact on property costs, meaning there will be a significant impact on the amount people can pay to buy commercial assets,” he added.
