Activity slows in Australia’s Capital Markets, but investment fundamentals remain supportive

The firm’s Australian Capital View – May 2026 found transaction volumes slowed in early 2026, falling to $7.3 billion in Q1 from $15.3 billion in Q4 2025.

The strength of transactions in the retail sector continued, with this sector the most traded asset class at $3.6 billion, followed by office ($2.1) billion and industrial ($1.2 billion). It is estimated that $2.1 billion of transactions remain under contract for Q1.
Knight

Knight Frank Senior Economist Alistair Read said:

“The escalation of the Iran conflict at the end of February proved to be a material inflection point for capital markets activity during the quarter, with robust early deal flow — underpinned by several large retail transactions — giving way to a marked softening through March as geopolitical uncertainty prompted many investors to adopt a cautious, wait-and-see stance.

“Concerns over a higher interest rate environment and broader macroeconomic headwinds are likely to temper near-term activity, however structural supply constraints across most asset classes continue to underpin a compelling medium-to-long-term investment case.”

Knight Frank Chief Economist Ben Burston said the renewed series of interest rate rises was unwelcome news for investors, with the experience of rate rises in 2022-23 still fresh in the memory. However, the wider market context is very different and will allow property to be more resilient this time around, he said.

“Firstly, valuations are at a different level having already adjusted to the higher rate environment. A recovery was commencing throughout 2025 but had yet to gather pace and broaden beyond core locations, so pricing is less vulnerable than at that time.

“Secondly, occupier markets are looking far healthier in the office and retail sectors in large part because of diminishing new supply. Office markets in particular are starting to see the benefit of a constrained supply pipeline, as evidenced by strong prime rental growth in the Brisbane, Sydney and Adelaide CBDs.

“Meeting feasibility targets was already challenging, but higher construction and material costs are now compounding that issue, which will further restrict new supply and ultimately support further rental growth. Our modelling indicates that a 10% rise in construction costs for a new premium office tower increases the required economic rent by around 5%.”

Institutional investors the most active, while superannuation funds have returned

The Knight Frank research found institutional investors remained the most active buyer group in Q1, accounting for 42% of total transaction volumes, followed by public capital at 23%, cross-border and private capital at 16% each.

This composition reflects growing institutional confidence in market fundamentals — most notably across the retail and office sectors — underpinning the outlook for medium-term investor returns.

Knight Frank Partner, Head of Capital Markets Australia Michael Kwok said while transactional activity may remain subdued in the near term, investor demand for quality assets remains intact.

“Higher funding costs and global uncertainty may impact trading activity in coming months, but there is still significant demand for quality assets given improving prospects for rental uplift,” he said.

“We expect most investors will continue with their plans to deploy capital, rather than step back from the office market as we saw in 2023.

“Looking beyond the recent headwinds, an interesting dynamic in capital markets has been the return of superannuation funds to making direct acquisitions. In recent years, most major funds have been circumspect, preferring to maintain rather than expand their holdings, however over the past 12 months many have opted to deploy capital directly, acquiring large assets across all sectors, however living sectors has been a favoured target.”