Commercial property likely to recover in 2024: Insights

The worst is behind us, according to a report from Knight Frank, which eyes the prospect of a recovery in the commercial property market.

Revealing its top predictions for the sector for 2024, Knight Frank said an improved vintage will ensure a year that is better for acquiring assets.

"The sustained pressure of higher rates has naturally put pressure on asset values, and this is still playing out to varying degrees," Knight Frank chief economist Ben Burston said.

"Part of the uncertainty has been a disconnect between formal valuation metrics and market sentiment. However, with more deal evidence now coming through and formal valuations likely to be adjusted further... we expect the gap between sentiment and formal valuations to erode substantially over the next six months so that by mid-2024 the picture will be clearer for buyers and sellers alike, helping to restore confidence and liquidity."

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While reductions in asset values aren't a good thing, the reemergence of value going forward is.

"Higher yields act to reset the market and provide a more attractive entry point for investors, generating the prospect of higher returns," he said.

"This is clearly illustrated when we assess historic market cycles and the performance achieved after pricing is reset in the aftermath of interest rate hiking cycles. The period immediately after the conclusion of the rate hike cycle ending in 1994, 2000 and 2010 was in each case a very attractive time to buy, achieving above average returns over the following five years."

However, he added that investors cannot expect rates to fall exactly as anticipated.

"But careful asset selection will maximise the chances of strong performance whether it is achieved through income growth or boosted by a return to yield compression as interest rates revert in 2024-26," he assured.

The caveat is linked to another key prediction from Knight Frank, being the flow-on impact to markets from the end of the so-called NICE era.

NICE - meaning 'non-inflationary consistent expansion' - conditions have prevailed locally for many years, however Burston said consumer expectations are now shifting with higher bond yields signalling that rates will not return to levels seen pre-2021 any time soon.

Knight Frank said this was primarily due to the strong fundamentals in Australia, including the strong long-term growth outlook after the current hiking cycle is done. That said, this may occur alongside a more unpredictable setting for inflation and interest rates over the next decade, it said.

"Lower rates may return, but they are unlikely to return to the lows of 2016 to 21 and investors will need to strategise for multiple scenarios," Burston warned.