Chapter 1

Introduction

Welcome to the December 2022 edition of Banner Asset Management’s Quarterly Property Report. Rising interest rates and higher living costs have continued to weigh on residential property values over the past three months, however rents are still rising as low supply levels drive down vacancy rates.

In commercial sectors, industrial and logistics property remains a standout performer with the national vacancy rate falling to another record low of 0.6%1, still the tightest vacancy globally.

In the office market, rents remain stable as employees’ ongoing preference to work from home and the tight labour market drive a continued focus on premium office space as companies seek to entice more people back to the workplace.

After a period of robust growth, Australia’s economy is expected to moderate as rising costs impact consumer spending and global growth slows.

Savvy investors will consider positioning their portfolios for the long term, by accessing sectors that benefit from structural tailwinds and by gaining exposure through lower risk structures such as commercial real estate debt (CRE) and low LVR debt funds.

We explore some of these strategies in this month’s Spotlight section, which looks at key investment themes for 2023.

We hope you find these insights useful.


Source:
  1. CBRE Research, (2023, January 23), “Figures Australia Industrial and Logistics National 4Q22”, Figures Australia Industrial and Logistics National 4Q22 | CBRE Australia
Chapter 2

Economic Update

Overview

Australia’s economy continues to grow, buoyed by household spending on domestic and international travel as COVID-19 restrictions continue to ease. The latest official data shows gross domestic product increased by 0.6% in the three months through September – marking the fourth quarter of economic growth following a contraction in the September quarter of 2021, which was impacted by the COVID-19 Delta outbreak.1

The growth in the September quarter was slightly lower than the 0.9% recorded in the prior three months as weaker commodity prices drove falls in mining profits and terms of trade.1

Annual growth was up a robust 5.9% in a rebound from a low base a year earlier when large parts of the economy were in COVID-related lockdowns.1

0.6
%
GDP rose by
0.6% in the
September quarter.
GDP rose by
0.6% in the
September quarter.
3.5
%
The unemployment
rate remained low
at 3.5% in December.
The unemployment
rate remained low
at 3.5% in December.
3.10
%
The RBA lifted
interest rates by
0.25% to 3.10% in
December, the eighth
increase in 2022.
The RBA lifted
interest rates by
0.25% to 3.10% in
December, the eighth
increase in 2022.
1.1
%
Australia’s population
growth accelerated
to 1.1% in the
year to June 2022.
Australia’s population
growth accelerated
to 1.1% in the
year to June 2022.

Source:
  1. Australian Bureau of Statistics, (2022, December 7) Economic activity increased 0.6% in September quarter [Press release] abs.gov.au/media-centre/ media-release/economic-activity-increased-06-centseptember- quarter

Moderated growth and elevated risks

Household spending buoyed by jobs

Household spending continued to drive growth, especially on eating out and new vehicles, as wages grew at the fastest pace since December 2006, supported by tight labour market conditions.1

The Reserve Bank of Australia (RBA) continued to raise official rates into the end of 2022 in a bid to stem inflation. The central bank increased its target cash rate by 25 basis points to 3.10% in December, marking the eighth increase in 2022.2

Inflation rose by 6.9% over the year to October, driven by global factors as well as strong domestic demand. The RBA forecast inflation to peak around 8% over the year to the December quarter 2022. Inflation is then expected to decline in 2023 due to the ongoing resolution of global supply-side problems, recent declines in some commodity prices, and slower growth in demand.3

In a statement accompanying the central bank’s monetary policy decision in December, RBA Governor Philip Lowe said the central bank expects to increase official interest rates further over the period ahead, but it is not on a pre-set course. It is closely monitoring the global economy, household spending and wage and price-setting behaviour.3

Economic growth expected to moderate

Lowe said while the economy continues to grow solidly, it is expected to moderate over the year ahead as the global economy slows, the bounce-back in spending on services runs its course, and growth in household consumption slows due to tighter financial conditions. The RBA’s central forecast is for economic growth of around 1.5% in 2023 and 2024.3

Consumer spending has been supported by past gains in incomes, asset prices and accumulated savings during the pandemic. However, these sources of support are being eroded to some extent by high inflation, rising interest rates and falling housing prices, and this is expected to contribute to a slowing in consumption growth from early 2023.4

Elevated risks to forecasts

The RBA has warned there are many uncertainties surrounding its forecasts that make the path to achieving the central bank’s objective of returning inflation to its target band while keeping the domestic economy on an even keel.4

RBA Deputy Governor Michele Bullock in a speech said the uncertainties around the RBA’s central forecast are particularly elevated at the moment, and include the international environment, wage and price setting behaviour, household consumption, and energy and supply shocks.4


Source:
  1. Australian Bureau of Statistics, (2022, December 7) Economic activity increased 0.6% in September quarter [Press release] abs.gov.au/media-centre/ media-release/economic-activity-increased-06-centseptember- quarter
  2. Reserve Bank of Australia, “Cash Rate Target”, rba.gov. au/statistics/cash-rate
  3. Reserve Bank of Australia, (2022. December 6) “Statement by Philip Lowe, Governor: Monetary Policy Decision” [Press release] rba.gov.au/mediarelease/ 2022/mr-22-41.html
  4. Michele Bullock, Deputy Governor, Reserve Bank of Australia, “The Economic Outlook”, speech to Australian Business Economists (2022, November 9) https://www. rba.gov.au/speeches/2022/sp-dg-2022-11-09.html

The numbers

Annual GDP growth rebounds strongly

5.9% increase of 2.3%

Source: ABS

Quarterly GDP growth eases

0.6% increase of 0.3%

Source: ABS

Unemployment rate remains low

3.5% unemployment rate

Source: ABS

RBA Cash Rate Target

3.1% Cash Rate increases by 0.25%

Source: ABS

Chapter 3

Residential

Performance

Hans Wibawa

Investment Analyst

Residential property prices continued to fall in the final quarter of 2022, declining by 3.3% as the cumulative impact of eight successive interest rate hikes forced monthly mortgage repayments significantly higher at the same time as rising inflation crimped household budgets.

The continued falls meant national dwelling values had slipped around 8% from their first-half peak, according to CoreLogic’s Home Value Index, though most were still higher than levels recorded prior to the COVID-19 pandemic.

On an annual basis, dwelling values fell 5.3% – the first calendar year decline since 2018 and largest calendar year decline since 2008.1

Apartments fared best in the December quarter, declining by 2.2% versus a 3.6% fall in house prices, according to CoreLogic.1

 


Source:
  1. CoreLogic, (2023, January 9) “Hedonic Home Value Index”, https://www.corelogic.com.au/__data/assets/ pdf_file/0021/12954/CoreLogic-home-value-index-Jan- 23-FINAL.pdf (Press release)

Slowing rents increase

A 2% rise in national rent values over the quarter pushed the annual increase to 10.2%7 – a jump fuelled by factors such as renewed immigration after Australia’s border reopened and low vacancy rates that spurred competition among tenants.

Rents across the country continued to move in the opposite direction to property prices in the last three months of 2022, albeit at a slower pace than previously.

Annual change in rents: HOUSES

Source: Corelogic

Annual change in rents: UNITS

Source: Corelogic

In New South Wales – where unit rents in Sydney rose 15.5% over the quarter1 – the state government banned so-called rent bidding from 17 December 20222 to improve housing affordability. Rent bidding is a practice in which landlords or real estate agents ask potential tenants to increase their offer of rent in order to secure a property.

Similar bans to the NSW policy already existed in Victoria3, Queensland4 and Tasmania5.

The Federal Government also formed an Interim National Housing Supply and Affordability Council to independently advise it on housing policy. The council commenced operation on January 1 this year.6


Source:
  1. CoreLogic, (2023, January 9) “Hedonic Home Value Index”, https://www.corelogic.com.au/__data/assets/ pdf_file/0021/12954/CoreLogic-home-value-index-Jan- 23-FINAL.pdf (Press release)
  2. NSW Government, (2022, 12 December), “NSW Government to make rent bidding illegal” https://www.nsw.gov.au/media-releases/nswgovernment- to-make-rent-bidding-illegal (Press release)
  3. Victorian Government, (Retrieved, January 2023), “Guide to rental law changes in Victoria” https://www. consumer.vic.gov.au/housing/renting/changes-torenting- laws/guide-to-rental-law-changes
  4. Queensland Government, (Retrieved, January 2023), “Rent bidding” https://www.rta.qld.gov.au/before-renting/choosing-arental- property/rent-bidding
  5. Tasmanian Government, (Retrieved, January 2023), “Rent”, https://cbos.tas.gov.au/topics/housing/renting/ during-a-tenancylease/rent
  6. Commonweatlh Treasury, (2022, December 20), “Interim National Housing Supply and Affordability Council”, Interim National Housing Supply and Affordability Council | Treasury Ministers (Press release)

Adjusted supply as sellers and builders wait

Home sales have dipped in a reflection of market conditions. CoreLogic estimated that capital city dwelling sales in the December quarter were 30.1% lower than the previous corresponding period and 9.2% below the previous 5-year average.1

On an annual basis, Sydney and Hobart were the only capital cities where sales estimates were below the previous five-year average.

Properties are still taking longer to sell than previously and property owners are adjusting price expectations as a result. The median time on the market was 31 days by year-end, up from around 20 days a year earlier. The flow of new listings in December was almost 10% lower than the five-year average.

As a result of market conditions, vendor discounting increased to 4.2% by the end of 2022 versus 3.1% at the end of the previous year.

Approvals to construct new dwellings have also been falling, which should help to limit further falls in dwelling values this year. Dwelling approvals fell by 9% in November and were down 15% over the year. Apartments in particular have experienced a strong adjustment. Private sector dwellings excluding housing (including semi-detached housing, row houses, terraces and apartments) fell by 22.7% in the month, and are down 21% over the year.


Source:
  1. Australian Bureau of Statistics, (2023, January 9), “Building Approvals Australia”,

Market snapshot

Source: Corelogic, SQM Research residential vacancy rates

Chapter 4

Industrial & Logistics

Industrial & logistics continues to be a standout performer with ongoing robust demand from tenants, especially in the e-commerce and third-party logistics sector.

The national vacancy rate fell to a record low of 0.6%, in the December quarter, according to CBRE, the tightest vacancy globally, reflecting chronic undersupply.1

The all-time low vacancy rate is driving record rental growth in the quarter. Supply weighted average super grade assets increased by 6.8% from the previous quarter, as demand outstripped supply. Year-on-year growth for super prime face rents stands at a record 25.3% as at fourth quarter 2022.1


Source:
  1. CBRE, (2023, January 23), “Figures Australia Industrial and Logistics National 4Q22”, Figures Australia Industrial and Logistics National 4Q22 | CBRE Australia

Vacancy rates 4Q 2022

Source: CBRE

Super prime net face rental growth 4Q22

Source: CBRE

Where now for industrial rents?

The supply shortage has been driven by structural change in the form of increased demand for online goods and services, which has led retailers and third-party logistics firms to scale up and has also shifted the goal posts for delivery time expectations and warehouse efficiency.

Knight Frank anticipates the focus of these firms will now shift to the strategic improvement and upgrading of the whole distribution network rather than rapid upscaling, however tenant demand will remain robust and structural undersupply won’t be resolved until more developable land comes online.2

It is expected that 2023 will be a record year for development completions, led by Brisbane and Melbourne, but this is unlikely to be sufficient to restore a more normal balance between supply and demand, particularly in Sydney.1

An equilibrium is unlikely to be restored until a larger quantum of developable land comes online in 2024-25. With tight supply set to continue, Knight Frank expects further rental uplift, but at a slower pace than the frenetic speed of 2022.


Source:
  1. Knight Frank, Outlook Report 2023, “Navigating the Path to Performance”, Outlook Report – 2023 | Knight Frank Research
  2. Knight Frank, Outlook Report 2023, “Navigating the Path to Performance”, Outlook Report – 2023 | Knight Frank Research

Market Overview

Melbourne

The Melbourne vacancy rate remains at a record low of 1.1% during a period of strong rental growth. Average super prime and prime rents grew by 9.4% and 5.6% respectively in the December quarter from the prior quarter. Gross take-up of floorspace in the December quarter was half that recorded in the prior quarter due to a shortage of space available to lease. Average land values for 0.2 ha and 1.6 ha lot sizes have appreciated by 25.2% and 22.3% respectively over the year.1

During a time of substantial increase in rental prices, the vacancy rate in Melbourne remains at an all-time low of 1.1%.

 

Sydney 

Sydney has the lowest vacancy rate of any city globally at 0.2% in the December quarter, amid strong occupier demand. Strong rental growth was recorded across most precincts, with the average super prime net face rents at a new record high year-on-year growth rate of 38.7%. Average land values for 0.25 ha, 1.6 ha and 3-5 ha lots have Increased by 14.2%, 16.9% and 29.4% year-on-year, respectively. Gross take-up by tenants decreased from the prior quarter due to an extreme supply shortage exacerbated by continued project delays. Floorspace leased was dominated by the Transport, Postal and Warehousing Sector.2

In December, Sydney boasts the lowest vacancy rate in any city globally, standing at a mere 0.2%.

 

Brisbane

Brisbane’s vacancy rate fell to 0.5% in the second half of 2022 as rents grew strongly.3 Occupier take-up increased in the quarter, finishing the year on a 10-year high. This was driven by high demand for industrial space coupled with an increased level of supply delivery during the year. CBRE expects Brisbane rents to continue to grow at above historic rates over 2023-26 due to solid population growth, relatively cheaper rents compared to other major cities in Australia, and continued demand for space from large occupiers that already have a space in Sydney and Melbourne. However, rents may stabilize in the short term as large amounts of stocks come online.4

During the second half of 2022, the vacancy rate in Brisbane declined to 0.5%. This was accompanied by a rise in rents and an increase in occupancy, which ended the year at a 10-year high.


Source:
  1. CBRE, (2023, January 23), Figures Melbourne Industrial and Logistics 4Q22, Figures Melbourne Industrial and Logistics 4Q22 | CBRE Australia
  2. CBRE, (2023, January 23), Figures Sydney Industrial and Logistics 4Q22, Figures Sydney Industrial and Logistics 4Q22 | CBRE Australia
  3. https://www.cbre.com.au/insights/reports/figures-australia-industrial-and-logistics-national-4q22
  4. CBRE, (2023, January 23), Figures Brisbane Industrial and Logistics 4Q22, Figures Brisbane Industrial and Logistics 4Q22 | CBRE Australia
Chapter 5

Office

Continued demand for premium office space

Nicholas Lakin

Chief Lending Officer

Employees’ ongoing preference to work from home and the tight labour market drove a continued focus on premium office space in the back end of 2022 as companies sought to entice more people into the workplace by offering the best locations, amenities and ESG credentials.

Knight Frank reports that overall vacancy rates in Sydney, Melbourne, Brisbane and Perth remained steady in the December quarter as a result of continuous occupier demand and the fact that no new supply was completed.1 Rents remained stable too, with marginal quarterly growth in Brisbane and Melbourne.

By late 2022, the office sector returned to the top ranking for transaction volumes ahead of other areas of commercial real estate. Around $15.2 billion of towers were traded, though this was 16% down on the level recorded in the previous year, according to CBRE.2

Uncertainty about whether full-time office work will again become the norm weighed on offshore investment, which fell by 50% in 2022.3 The extent of this uncertainty was shown by an Australian HR Institute survey in July which found 53% of HR professionals expected working from home or remote working arrangements to remain the same over the following two years.


Source:
  1. Knight Frank, (2023, January 17), “Asia-Pacific Office Occupier Highlights Q4 2022”, Knight Frank Asia- Pacific Q4 2022 Office Highlights.pdf
  2. CBRE, (2022, December 15), “In and Out Australia 2022”, In and Out Report H1 22 – Australia (llnwd.net)
  3. AHRI Pulse, (2022, August), “August 2022 Headline Findings”, AHRI-Pulse-Headline-Findings-Aug2022.pdf

Overview

Melbourne CBD

Workers have been slow to return to Melbourne’s CBD following strict pandemic lockdowns, but the Property Council of Australia’s Office Occupancy survey suggests the city may be turning a corner. In the final quarter of 2022, occupancy rates (of workers physically present in office buildings) increased 12% in November to 57%, the highest level recorded since the start of the pandemic1.

Vacancy rates in prime properties sat at 12.3% in the December quarter, Cushman & Wakefield data shows. Premium and A-grade buildings had lower vacancy rates than B-grade offices, with tenants seeking to use higher quality properties to attract and retain staff2. Knight Frank expects vacancy rates to remain stable over the coming year with new supply expected to match demand.

Limited supply of new office space was added in 2022, according to Cushman & Wakefield, and around 100,000 sqm of net lettable area is expected to come online in 2023. The new developments of 555 Collins St and Melbourne Quarter Tower and the full refurbishment of 500 Bourke Street are the most notable developments due for completion in the coming year.

12.9%
Vacancy rate for Melbourne CBD

 

Sydney CBD

Leasing enquiries in Sydney remained strong in the final quarter of 2022, Cushman & Wakefield reports, but tenants were slower in making decisions particularly concerning spaces larger than 500 sqm reflecting concerns about the economic outlook3.

Tenant demand for prime office space held up throughout 2022. Knight Frank’s data shows prime office vacancy rates in the city sat at 10.3% in the fourth quarter, lower than in the other capital cities29, while Cushman & Wakefield reports prime face rents increased 4.2% through the year.

Consistent with the broader market, lower grade properties required higher incentives, leading to a 1.2% decline in gross effective rents over the quarter, according to Cushman & Wakefield figures.

On the supply side, more than 205,000 sqm of newly built premium offices and freshly renovated A-grade buildings came online in Sydney’s CBD in 2022, but Knight Frank expects the supply pipeline for 2023 to be much smaller.

Higher interest rates are beginning to affect pricing with Cushman & Wakefield noting that yields on prime properties and secondary properties increased by 12.5 basis points and 25 basis points, respectively.

8.6%
Vacancy rate for Sydney CBD

 

Brisbane CBD

A lack of supply along with rising inflation lifted rents across all grades of Brisbane CBD offices in the fourth quarter of 2023. Despite Brisbane prime offices having a vacancy rate of 14.3% in the December quarter, above that for other Australian capitals, prime rental rates increased by 1.1% over the quarter, and 5.0% compared with the fourth quarter of 2019, before the onset of the COVID pandemic4.

Cushman & Wakefield suggests workforce increases forecast by Deloitte Access Economics mean Brisbane will need an additional 265,000 sqm of office floorspace over the coming year, but only around 195,000 sqm is recently completed or due for completion5. Constrained supply, combined with ongoing high inflation is expected to put additional upward pressure on rents in 2023.

14.0%
Vacancy rate for Brisbane CBD


Source:
  1. Property Australia, (2022, December 13), “Latest office occupancy data is in”, property-australia-blog/ latest-office-occupancy-data-is-in (Property Council of Australia) property-australia-blog/latest-officeoccupancy- data-is-in (Property Council of Australia)
  2. Cushman & Wakefield, (2023, January 18), “Marketbeat Melbourne CBD Office Q4 2022”, Melbourne MarketBeat | Australia | Cushman & Wakefield (cushmanwakefield.com)
  3. Cushman & Wakefield, (2023, January 18), “Marketbeat Sydney CBD Office Q4 2022”, Sydney MarketBeat Reports | Australia | Cushman & Wakefield (cushmanwakefield.com)
  4. Knight Frank, (2023, January 17), “Asia-Pacific Office Occupier Highlights Q4 2022”, Knight Frank Asia- Pacific Q4 2022 Office Highlights.pdf
  5. Knight Frank, (2023, January 17), “Asia-Pacific Office Occupier Highlights Q4 2022”, Knight Frank Asia- Pacific Q4 2022 Office Highlights.pdf
  6. Cushman & Wakefield, (2023, January 18), “Marketbeat Brisbane CBD Office Q4 2022”, Brisbane MarketBeat | Australia | Cushman & Wakefield (cushmanwakefield. com)
Chapter 6

Spotlight

Navigating the Australian property market in 2023: Opportunities and risks

Andrew Turner

Founder and CEO

After a 29% post-COVID upswing, residential property values have been driven lower by rising interest rates as the RBA sought to combat rising inflation and consumers faced cost of living pressures due to rising interest rates.

2022 was a challenging year for property markets in Australia with rising interest rates, a weakening global economic outlook, and ongoing uncertainty around hybrid work arrangements dampening sentiment towards the sector and constraining transaction activity.

After a 29% post-COVID upswing, residential property values have been driven lower by rising interest rates as the Reserve Bank of Australia sought to combat rising inflation and consumers faced cost of living pressures due to rising interest rates. However, rents have continued to rise, as a shortage of supply met increased demand for rental accommodation, supported by rising immigration.

Outside the residential sector, transaction volumes to the end of 2022 across office, retail and industrial reached $35.9 billion, down 29% from $50.5 billion compared with 2021, according to CBRE1. The market is absorbing the impact of global market volatility and rising interest rates and inflation. Increasing bond yields have put pressure on property valuations, causing some investors to sit on the sidelines awaiting pricing clarity.

The industrial and logistics sector has been a standout thanks to continued strong demand from third party logistics tenants in the face of a structural supply deficit. The national industrial vacancy rate has hovered below 1% all year, according to CBRE figures, making Australia the tightest industrial rental market in the world.2


Source:
  1. CBRE, (2022, December 15), “Office assets in favour as commercial property sales pause”, Office assets in favour as commercial property sales pause | CBRE Australia
  2. Allison Worrall, Commercial Real Estate, (2022, December 9), “The commercial property winners of 2022”, https://www.commercialrealestate.com.au/news/ the-commercial-property-winners-of-2022-1186198/

Outlook

This year the key emerging factors that will be at play in the market are likely to be a slowing economy and changes in the operating environment, which will have a varying impact on different sectors.

High interest rates, increased construction and operating costs, and inflation are the top four concerns for investors looking ahead, a survey of 750 global investors in late 2022 by Colliers International found.1

The global economy is likely to weaken in 2023 with the effects of high inflation, continuing supply chain disruptions, and geopolitical instability continuing to drag on activity.

The International Monetary Fund is forecasting global growth to slow from 3.2% in 2022 to 2.7% in 2023. Advanced economies are expected to fare even worse, with growth projections for those regions of only 1.1% in 2023, down from 2.4% in 20222.

The impact of slowing global growth on demand for Australia’s goods and services, along with domestic pressures on consumer spending from rising living costs, are expected to cause Australia’s economy to slow in 2023.


Source:
  1. Colliers International, (2022, December 8), “2023 Global Investor Outlook: Asia Pacific Highlights”, Colliers | 2023 Global Investor Outlook: Asia Pacific Highlights
  2. International Monetary Fund, (2022, October), “Countering the cost-of-living crisis, World Economic Outlook Report, October 2022”, World Economic Outlook, October 2022: Countering the Cost-of-Living Crisis (imf.org)

The state of the Australian property market

In the face of headwinds from a slowing economy, capital values in residential and commercial property markets are likely to come under pressure.

Residential
Australian residential property values fell in 2022 by around 8% from a peak early in the year, CoreLogic’s Home Value Index found1. According to a Reuters poll of analysts, Australian property markets could see a 16% decline in value from peak-to-trough,
more than double the correction during the 2008 financial crisis.2 However, a critical shortage of rental accommodation has the potential to support rents and keep downward pressure on vacancy rates.

Industrial
Valuations in the industrial and logistics sector are expected to continue to rise but at a slower pace as demand continues to outweigh supply. JLL expects offshore buyers to have a major focus on the sector, with rental growth likely to continue. Many investors are still underweight industrial, despite the influx of capital into the sector in recent years and are expected to continue to reweight their portfolios to address this.3

Office
Office property, like other sectors, faces challenges from rising inflation and higher interest rates. Savills says that a potential economic slowdown and consequent job losses may increase leasing risk in some markets. These headwinds are likely to reinforce demand for premium and quality A-grade buildings.4


Source:
  1. CoreLogic, (2023, January 9), “Hedonic Home Value Index”, https://www.corelogic.com.au/__data/assets/ pdf_file/0021/12954/CoreLogic-home-value-index-Jan- 23-FINAL.pdf (Press release)
  2. Vivek Mishra, Reuters, (2022, November 25), “Australia house prices forecast to slump 16% from peak”, Australia house prices forecast to slump 16% from peak | Reuters
  3. Nick Lenaghan, Australian Financial Review, (2022, October 10), “Deals slow as values wobble: JLL, Macquarie”, Property deals slow as values wobble: JLL, Macquarie (afr.com)
  4. Savills, (2022, December 22), “Australia Offices 2H/2022”, Savills Australia | Australia Offices 2H 2022

The key investing themes set to shape 2023

While conditions may be weak in 2023, Australia’s economic growth is likely to pick up again in 2024. The Reserve Bank of Australia noted in its December meeting that inflation appears to have peaked already in several countries with falling oil prices and easing supply-chain pressures accompanying softer economic conditions.1

Central banks have started easing the rate of interest rate increases, and residential property markets will begin to normalise when rate rises ease.

It should be noted that there are tailwinds supporting property markets in Australia. Population growth and returning immigration following restrictions to international relocations due to the COVID pandemic are underpinning markets, while strong flows into the superannuation system continue to add liquidity.

Savvy investors will consider positioning their portfolios for the long term, by seeking exposure to lower risk sectors that benefit from long-term structural tailwinds.

Safe havens and sectors with structural tailwinds
In the near-term, many investors will seek safe havens in high quality assets in good locations, with stable tenants and relatively long weighted average lease expiries (WALEs).

But there are other opportunities outside of these premium assets for property investors wishing to continue their exposure to the Australian property sector in the current market, while minimising exposure to the impacts of a cyclical downturn in the economy.

For example, alternative and emerging asset classes such as student accommodation and build-to-rent properties stand to benefit from returning migration and travel, while industrial and logistics assets are supported by the long-term shift towards e-commerce and more recent trends towards near-shoring – with businesses seeking local suppliers to combat disruptions in international supply chains.

Australia’s logistics sector is one of four top sectors expected by investors to do better than others in Asia 2023, along with Japan multifamily, China multifamily and China logistics, according to JLL. The fundamental undersupply of prime space in core locations, such as in Sydney and Melbourne, and rental reviews by landlords who are factoring in inflationary pressures, are expected to put upward pressure on logistics rents across the country. These market conditions make Australian cities favourites to emerge as the top rental growth performers in 2023.2

CRE debt limits exposure to price fluctuations

Another approach would be to invest in commercial real estate debt (CRE debt), which offers a way to invest in property markets with a lower exposure to fluctuations in capital values.

As we discussed in a previous spotlight on CRE debt, reduced bank lending to the commercial property sector has created opportunities for non-bank investors to participate in this space.

CRE debt investment is considered defensive for four key reasons:

  1. It is typically structured as a loan secured against a property via a first mortgage, offering stable income returns through agreed interest payments. These contractually agreed payments insulate the lender from the volatility of fluctuating rents/prices. A first mortgage has priority over all other claims on the property in the event of an ordinary sale or default.
  2. Property assets are typically financed by a mix of debt and equity capital, providing an “equity buffer” or “first loss” position between the assessed asset value of the property and the debt. This means that should the asset value decline, the lender is significantly more protected, as the “first loss” position has to be eroded before there is a potential capital loss to the lender.
  3. CRE debt is backed by a suite of covenants that protect the lender in the event of capital value or income declines, such as loan-to-value ratios, debt service cover ratios, and pre-sales cover ratios. These provide well proven legal recourse in Australia.
  4. CRE debt investments in Australia are based on project specific metrics – such as current (not historical) valuation assessments, pre-sales at agreed (contracted) prices, and geographic and sector attributes – rather than medium-to long-term real estate investment cycles and trends.

 

Reducing risk through low loan-to-value ratio funds

Investing in CRE debt with low loan-to-value ratios (LVR) can further shield investors from property price fluctuations affecting an investment. Low LVR debt limits exposure to value of the security, while still achieving attractive risk-adjusted returns.

For example, the Banner Low LVR Income Fund pays monthly income with investments limited to no more than 55% of the assessed value of any property.

The next 12 months will present challenges for the global economy and property markets, but there are opportunities for investors to continue to participate in the sector while protecting their portfolios against any heightened volatility.

The fundamentals underpinning Australia’s property market remain strong and it is experiencing several tailwinds that should support performance over the coming year. Investors looking to gain exposure to the market in the current environment while minimising the risk of any corrections in equity prices as the economy slows can do so by looking at lower risk options such as CRE debt funds or low LVR funds, as well as sectors supported by long-term structural changes in the economy.


Source:
  1. Reserve Bank of Australia, (2022, December 6), “Minutes of the monetary policy meeting of the Reserve Bank Board”, 6 December 2022 | Minutes of the Monetary Policy Meeting of the Board | RBA
  2. JLL, (2023, January 17), “4 bright spots for investors in 2023”, 4 bright spots for investors in 2023 (jll.com.au)

Our clear vision for success

We provide an opportunity for investors to gain exposure to the real estate debt market through lending to established and proven developers for development projects, or for strategic acquisition of sites earmarked for development in the future.

10 Years
Banner has been managing funds
for investors for over 10 years.
$5 Billion
Managing over 10 funds,
single asset or pooled, over
$5b in projects financed with
consistent performance.

A consistent and rigorous approach

At Banner Asset Management we provide opportunities to invest in secured debt products and other property through funds alongside project partners.

We invest in developments with a proven use, evidenced either by presales or lease agreements, as well as strong fundamentals, including proximity to population growth and the likelihood of resilient demand.

In the residential space, our focus is on medium density development (apartments and town-houses) in the bigger population centres of Sydney, Melbourne, and Southeast Queensland, which provide greater liquidity and depth than other markets in Australia. This includes mixed-use residential projects that incorporate uses such as office space or retail. We also invest in non-discretionary retail and the industrial sectors, as growth in e-commerce drives demand for warehousing and logistics.

About us

Banner strives to deliver attractive risk adjusted returns for investors.

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