Property markets on upswing but construction issues persist

Australia’s residential and commercial property markets are set for a sustained period of growth with lower interest rates fuelling increased demand and persistent supply shortages pushing asset values higher.

These are among the major takeouts from a panel discussion of industry experts at a Centuria Bass Credit client event in Sydney recently which also discussed the growing role of private credit in funding property development.

Nerida Conisbee, Ray White’s Chief Economist, says the residential market is now “incredibly strong” after briefly slowing toward the end of 2024.

“We do expect this year to be another very strong year because of interest rates coming down,” she said. “Whether we see three or four cuts, they’re certainly going to be a lot lower than they were last year.”

But she warned construction industry issues including the high cost of labour and materials will persist and impact on the availability of affordable housing in Australia.

“We’ve still got varying degrees of stress in the industry and don’t have the capacity to build enough homes to make Australian housing affordable,” Ms Conisbee said.

“The government has set a target of 1.2 million homes. It’s the right target but we can’t build that many homes.”

“The government can only do so much (and there will be) persistent housing shortages for quite some time.”

Jason Huljich, Joint CEO at Centuria Capital, said commercial property is trending upwards on several key indicators after a challenging couple of years. The game has now changed with interest rates coming down.

“I think we’ve definitely seen the trough,” he said. “There’s some really good green shoots emerging and it’s looking pretty positive over the next 12 months.”

Mr Huljich says the high cost of development will strongly advantage existing property owners.

He said Centuria Capital research shows the cost to develop an A-Grade office in Sydney’s suburbs has increased 40% in the past four years to $15,000 sqm – requiring rent of $1000 sqm to make it economically feasible.

Typical rents, however, are $600 sqm across Centuria’s high-quality office portfolio.

“We’ve got this huge demand from immigration and a lack of supply due to construction costs, so we think over the medium term it’s going to be really positive for rental growth, occupancy and property values, so you’ve got some good news coming through.”

Industrial property has led the way. Mr Huljich said industrial rental re-leasing spreads across the Centuria portfolio for the six months to 31 December ’24 increased 50% and that rents in some of its industrial assets have tripled since COVID.

“We’ve had so much rental growth in that sector, where usual spreads are 2% to 3%.”

Another positive is that asset transaction volumes are “ticking up” with a significant increase in foreign interest led by the Japanese, Singaporeans and Germans.

“Down in Melbourne you’ve seen the private money come back into the CBD office market, which is a really good sign.”

He adds there are more bidders on quality commercial properties than 12 months ago.

On the development front, David Stone, Managing Director Origination at Centuria Bass Credit, said the past two years have been “really tough” for developers.

In addition to higher costs and labour shortages, Mr Stone said “it’s very hard to get sufficient presale coverage to kick off projects”.

As a result, he said the preferred development business model has shifted from developers working with third-party builders to doing it all inhouse.

He said demand from developers for private credit is stronger than ever despite the higher cost of finance compared with banks.

“The banks’ appetite for risk turns on and off quite quickly and I think what private credit allows is some certainty in and around credit decisions,” Mr Stone said.

“More often than not, you get speed with decision making and it’s flexible in terms of the covenants.”

“Often the difference between bank finance and private credit is that little bit of additional leverage that allows a private developer’s equity to be spread further.”

Mr Stone said the outlook for private credit is very positive.

“Compared to the UK and the US the market is still relatively immature and we’ve still got a long way to go,” he said.

“However, I think there are some shorter-term difficulties.“

“There is a weight of capital in the market and unfortunately when there’s a weight of capital, some private credit providers throw out the private credit handbook. So it is really important as an investor to be with a fund that is patient and disciplined.”