_The capital value correction is close to be complete, with activity now picking up

There are signs the institutional office market has reached – or is close to – the bottom of the cycle, with the capital value correction that has been apparent for the past two years, expected be complete by the end of the first quarter of next year with valuations and ‘market value’ likely to reach parity at this time.

The peak to trough value correction will be in the order of 25% to 30% nationally once the cycle is complete, with Sydney CBD values leading the correction. Recent transactions, including the sale of 55 Pitt Street, Sydney and 240 Queen Street, Brisbane are evidence that conviction in capital values is being restored amongst investors.

Until recent months there had been a dearth of transactions, which meant there was not enough evidence of where capital values were sitting and hence we saw a prolonged correction. But with greater transaction activity, the tide looks to be turning.

Recent sales have served to reset values to a degree, and have fostered greater confidence amongst institutional investors. As such, we expect to see greater activity and increased transactions throughout the remainder of 2024.

Sellers are becoming more active, and while there is still some reluctance, Q3 and Q4 are likely to be busy in terms of the amount of assets hitting the market, with institutions looking to sell down primarily to reduce gearing.

Some investors are still keenly looking at potential rate cuts prior to actively participating in sales processes. There is still a belief that there may be further rises, however we are likely either at the top of the interest rate cycle or very, very close.

Which assets are the most sought after, and where?

One of the key themes we are seeing in the Institutional market now is that risk is beginning to be appropriately priced.

Prime high-quality leading ESG-credentialed assets will be – and are - in demand and will lead the way with yield compression once decompression is complete. In contrast, poorly located older assets without appropriate ESG credentials will suffer the largest value reduction. Landlords with assets in the latter category are advised to invest in ESG initiatives. Brown to green investments are still quite desired, however they need to be purchased at the right price for the refurbishment to be feasible.

Assets in Sydney – particularly the premium CBD market - and Brisbane are undoubtedly the most desired amongst institutional buyers, with these cities leading the way with strong leasing results.

Capital raising is underway

There is a significant capital raising processes currently underway within the Australian market. Investment managers in Australia are looking further afield to source capital as it has been particularly hard to do so for the last two to three years. They are seeking help from advisors to source this capital to execute their investment strategies.

For capital looking to invest, the Living and Industrial and Logistics sectors are in most demand. Within the Living sector, the subsets of Co-Living and Student Accommodation are of particular interest, in addition to land lease communities. All of these are seen as a key way to solve the Australian housing shortage, and can produce solid returns for investors.

Investors are starting to consider counter cyclical office strategies with those involving assets in Sydney and Brisbane of most interest. Some office assets will come back into vogue with location, quality and ESG the three key factors in whether there will be investor demand for the product or not.

Ventures with Seed assets and access to pipeline are most desired, as investors want to see deals can actually be executed rather than ideas.

For more information or to discuss the market, please contact me on ben.schubert@au.knightfrank.com or 0403 195 424.