According to Knight Frank's Australian Capital View 2019 Study, Australia's industrial and office sectors are expected to post double-digit returns in 2019, making them the most profitable asset classes in commercial real estate. Buy Apartments in The Pearl | Property Hunter
Industrial is expected to lead the way, with overall returns of 13.4 percent, according to Ben Burston, Knight Frank's Partner, Head of Research & Consultancy Australia. Offices will follow at 11.4 percent.
"Despite slower economic growth in the second half of 2018, the commercial real estate outlook remains positive, thanks to strong tenant demand. We expect the market to shift from yield compression to rental growth as the primary driver of success as the year progresses, and as a result of this shift, the office and industrial sectors will produce another year of strong returns due to ongoing supply shortages."
Due to tight supply and sustained demand momentum, Australian Capital View predicts net face rental growth across the major CBD office markets over the next five years, with Sydney (23%) and Melbourne (20%) leading the list.
"We expect the fastest growth in the office sector this year in Melbourne, but over the next five years, Sydney's very small speculative development pipeline is projected to result in the fastest growth nationally," Mr. Burston said.
According to Knight Frank's Robert Salerno, Partner, Head of Industrial Australia, prime grade industrial investment stock has never been more sought after, as the market continues to see the flow-on effect from sustained strong occupier demand and consequent rental growth.
"On the other hand, getting into the market remains challenging, and investors seeking size through portfolio acquisitions are willing to pay a premium for it. We expect this trend to continue in 2019, with investors looking for new ways to increase their exposure to the sector " In the year to January 2019, net face rentals in Sydney and Melbourne increased by 4.1 percent and 4.3 percent, respectively, while Brisbane and Perth saw 2.5 percent and 1.7 percent increases. As developers seek to maximize rental returns, this has contributed to and will continue to lead to more speculative growth.
"The window of opportunity in Australian office markets is still open," said Paul Roberts, Knight Frank's Partner and Joint Head of Institutional Sales Australia. "However, greater selectivity will be needed in 2019 to find markets and assets with the best prospects for rental uplift."
Tight occupational markets in Sydney and Melbourne will support more rental growth and keep prime yields stable, while emerging fringe and suburban markets in both cities continue to offer significant growth potential. "Brisbane and Perth are expected to benefit from improved leasing market sentiment, and investors seeking higher income returns will be attracted to these markets in greater numbers."
Despite a drop in global commercial real estate investment in 2019, demand remains high.
Following a rocky 2018, global real estate consultancy JLL reported this week that investment in global commercial real estate cooled in the first half of 2019, with year-over-year volumes falling by 9% to $341 billion.
All three regions behaved differently, with activity dropping in EMEA and the Americas, while Asia Pacific set a new first-half high of $86 billion.
Investor confidence is being impacted by structural changes in the retail sector, as well as ongoing political and economic instability.
Risk-free yields, on the other hand, continue to fall, lowering borrowing costs and widening property spreads at a time when buyers are looking for yield more than ever. Despite the fact that prices have risen in many global markets, fundamentals remain strong, underwriting is disciplined, debt levels are generally low, and investors are still interested in the sector, according to JLL.
According to JLL, funding by private closed-end real estate funds reached an all-time high of $80.3 billion in the first half. Meanwhile, dry powder continues to rise, reaching a new high of $331 billion. Managers are finding it difficult to deploy resources in a world where costs are rising as the current cycle continues.
As investors continue to adapt to the overall global economy, JLL expects investment to decline by approximately 5-10 percent in the second half of 2019, to around $730 billion for the full year.