Real asset cycle likely to return: Dexus

While the past year was a challenging one for most real asset sectors, Dexus Research believes transaction markets will become more active in 2024.

Based on the latest Australian Real Asset Review by Dexus Research, the strong performance of the listed real estate market during Q4 of 2023 could be a sign of a shift in investor attitude.

Dexus believes investors are regaining confidence and it may have an impact across the entire real asset spectrum.

"Australian shares returned 8.4% through the fourth quarter and 12.4% per annum in 2023," the report said.

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"A-REITs experienced even stronger growth, returning 16.6% in the quarter and 17.6% over the year."

Dexus added that with the interest rate cycle expected to peak, further falls in bond yields should be positive for A-REIT pricing in 2024.

"While a slowing in the economy is a consideration for occupier activity in the short term, a forecast fall in interest rates in FY25 is expected to be a major positive for real asset valuation as investors factor in a lower cost of capital," Dexus said.

"Of the real asset sectors, office, retail and industrial are likely to be more sensitive to economic conditions than some other real asset sectors such as healthcare, student accommodation and infrastructure."

The report highlighted crucial trends that are likely to influence the infrastructure market in Australia.

These include a shortage of social infrastructure, which is expected to continue. Additionally, there is a narrowing of the return gap between equity and credit investments, which is anticipated to lead to an increase in fundraising activity.

Moreover, the sale processes that were halted in 2023 due to resetting of portfolio allocations and stabilisation of interest rates are likely to resume.

When it comes to healthcare assets, Dexus believes that there is potential for increasing investment.

The sector needs a significant boost in capacity to cater to a rising and aging population, it said.

"The underlying sentiment for healthcare remains very positive due to the diversification benefits and long-term growth thematic," it said.

Dexus head of research Peter Studley said the longer-term demand outlook for all real asset sectors will be buoyed by population growth and stabilising interest rates.

"An increase in Australia's population of 624,100 people in the financial year to Q2 2023 (+2.4%) driven by a surge in net migration, combined with the expected peaking of interest rates in CY25, should give investors greater confidence in the outlook for real assets," he said.