Chapter 1

Introduction

Introduction

Welcome to the Q4 2023 edition of Banner Asset Management’s Quarterly Property Report.

Residential property markets continued to strengthen in the three months to the end of December, led by homes in more affordable smaller capitals and regional areas.

Residential rental markets were also strong, characterised by tight vacancy rates and rising rents.

Supply continues to exceed demand in the office sector with vacancy rates remaining very high. However, employers are adopting creative strategies to entice workers back to the office, while new supply is slowing in the cities with the highest vacancy rates. Combined, these factors could have flow on effects to rental growth and reduced incentives as space is taken up.

As in previous quarters, industrial and logistics properties benefited from population growth and ongoing e-commerce demand. Increasing speculative development in some centres could lead to greater leasing activity but with tight vacancy rates and shortages of space continuing to dog the sector, rental rates are expected to continue to rise.

In our Spotlight section, we explore the factors that have allowed Australian residential borrowers to adapt to higher interest rates without experiencing the level of financial stress some commentators had forecast. We also examine what borrowers’ resilience means for the Australian economy and property markets.

We hope you find these insights useful.

Chapter 2

Economic Update

Overview

Australia’s economy grew by a modest 0.2% during the September quarter and 2.1% in annual terms, according to the latest official figures1.

It was the eighth straight quarter of economic growth, though the speed of growth slowed from levels recorded earlier in the year. Ongoing migration also meant that GDP per capita fell by 0.5% following a smaller decline in the previous three-month period.

The primary contributors to growth in the September quarter were government expenditure and capital investment, according to the Australian Bureau of Statistics (ABS).

Builders worked through housing backlogs, with new dwelling construction up 0.2% as supply chain pressures began to ease. This activity was driven by a 1% rise in alterations and additions – following seven consecutive falls – though approvals for new dwelling kept trending downwards2.

The Reserve Bank of Australia (RBA) lifted interest rates by 0.25 percentage points to 4.35% at its November meeting after a four-month hiatus in rate hikes, stating that inflation had passed its peak but remained too high and more persistent than expected.

It then kept rates steady in December, noting that inflation had continued to moderate and higher rates were working to establish a more sustainable balance between supply and demand.

“To date, medium-term inflation expectations have been consistent with the inflation target and it is important that this remains the case,” RBA Governor Michele Bullock said in a statement accompanying the December monetary policy meeting.

“Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable time frame will depend upon the data and the evolving assessment of risks,” she said3.

Annual inflation has since moderated by falling to 4.3% in November from 4.9% in October4. Media reported that the monthly consumer price indicator was lower than most economists expected and thus reinforced expectations the RBA will likely keep rates stable after its first monetary policy meeting of 2024 in early February5.

0.2
%
GDP rose by
0.2% in the
September
quarter.
GDP rose by
0.2% in the
September
quarter.
3.9
%
The unemployment
rate remained low
at 3.9% in December.
The unemployment
rate remained low
at 3.9% in December.
0.25
%
The RBA lifted
interest rates by
0.25 percentage
points in the
December quarter.
The RBA lifted
interest rates by
0.25 percentage
points in the
December quarter.
2.4
%
Australia’s population
growth accelerated by
2.4% to 26.6 million
in the year to June 30.
Australia’s population
growth accelerated by
2.4% to 26.6 million
in the year to June 30.

Source:
  1. Australian Bureau of Statistics (December 6, 2023), 11 things that happened in the Australian economy during the September quarter.
  2. Australian Bureau of Statistics (December 6, 2023), 11 things that happened in the Australian economy during the September quarter.
  3. Reserve Bank of Australia (December 5, 2023), Statement by Michele Bullock, Governor: Monetary Policy Decision.
  4. Australian Bureau of Statistics (January 10, 2024), Monthly Consumer Price Index Indicator.
  5. The Australian Financial Review (January 10, 2024), Inflation eases but don’t expect rate cuts soon.

The numbers

Annual GDP growth stable

2.1%
Remained stable this quarter

source: ABS

Quarterly GDP slips

0.2%
Decreased 0.2% this quarter

source: ABS

Unemployment rate steady

3.9%
Remained stable this month

source: ABS

RBA cash rate target

4.35%
Increased 0.25% this quarter

source: ABS

Chapter 3

Residential

Performance

While the capital cities posted the largest value gains over the year – led by Perth, Brisbane and Sydney – CoreLogic’s national Home Value Index shows regional centres matched the growth rate in capital cities during the December quarter by gaining 1.5%1.

Over the latest housing market cycle that began with the onset of COVID-19, regional housing has increased much more in value than homes in capital cities, with 45.9% growth compared to 27.4% for the combined capitals2.

Hans Wibawa

Investment Analyst

The national housing market rebounded in 2023 with dwelling values gaining 8.1% over the year following a 4.9% decline across 2022.


Source:
  1. CoreLogic (January 2, 2024), Hedonic Home Value Index.
  2. CoreLogic (January 2, 2024), Hedonic Home Value Index.

Regions remain relatively affordable

The great diversity of regional areas means local supply and demand factors play a significant role in each market. For example, major floods in the Lismore region in 2022 created shortages of housing and suitable development land in that area.

Banner is adding supply, having recently invested in the proposed Platypus Park development in Goonellabah, which is just six kilometres from Lismore CBD and 21 kilometres from the Ballina-Byron airport – but sits outside the flood-prone areas.

The project will deliver 90 residential lots with Stage 1 civil works currently underway and is expected to attract buyers who are interested in moving out of flood affected areas.

Rental markets 
In rental markets, regional centres are also performing strongly. Gross rental yields in the combined regions were 4.4% in the December quarter, compared with 3.5% in the combined capitals1.

The nation’s highest rental yields were in regional Northern Territory (6.9%), Darwin (6.5%) and regional Western Australia (6.4%)2. Standout performers were Kambalda East (15.5%) and Boulder (12%),
near Kalgoorlie in Western Australia’s gold fields, according to CoreLogic’s Best of the Best report3.

Regional vacancy rates fell over the second half of 2023, according to PropTrack research4, and with demand outstripping supply of rental properties, rents are expected to continue to rise.

Rents across the capital cities increased 8.3% nationally across the quarter, CoreLogic reports5.

Read more about residential property in our Spotlight section – which takes a closer look at the resilience of Australian homeowners to higher interest rates.

 


Source:
  1. CoreLogic (January 2, 2024), Hedonic Home Value Index.
  2. CoreLogic (January 2, 2024), Hedonic Home Value Index.
  3. CoreLogic (December 14, 2023), 2023: Resilience, recovery and an unlikely upswing.
  4. PropTrack (December 2023), Property Market Outlook.
  5. CoreLogic (January 2, 2024), Hedonic Home Value Index.

Chapter 4

Industrial & Logistics

Nicholas Lakin

Chief Lending Officer

Industrial held its place as the dominant performer in commercial property sectors throughout 2023 and expectations are for this to continue, driven by population growth and ongoing e-commerce demand.

Strong demand and tight vacancy rates

Vacancy rates have eased slightly from early 2023 but remain at extremely low levels, of 1.1% nationally1. Notably, Sydney retains its title for having the world’s tightest industrial vacancy rate, at 0.5%2.

Investors continue to be drawn to the asset class by rental growth, which is expected to continue to rise faster than inflation3. Nationally, super prime weighted-average net face rents increased by 2.9%  over the December quarter, while prime and secondary grade weighted-average rents increased by 2.4% and 0.9%, respectively, according to CBRE data4.

Lease activity and transaction volumes in the sector have been limited by a lack of available space. Strong tenant demand saw most of the 2.9 million square metres of floorspace added in 2023 taken up by the market, while transaction volumes for the calendar year, at $5 billion, were below the long-run average of $5.5 billion5.

In 2024, an additional 3.7 million square metres is expected to come online, with 40% in the tight Sydney market. With most being speculative development, the market may see increased lease activity over the next 12 months6.


Source:
  1. CBRE (January 24, 2024), Industrial & Logistics Australia Figures 4Q23.
  2. CBRE (December 12, 2023), Australia's vacancy rate, continues to be the lowest globally
  3. AFR (January 15, 2024), What the top property bankers really think about 2024.
  4. CBRE (January 24, 2024), Industrial & Logistics Australia Figures 4Q23.
  5. CBRE (January 24, 2024), Industrial & Logistics Australia Figures 4Q23.
  6. CBRE (January 24, 2024), Industrial & Logistics Australia Figures 4Q23.

Vacancy rates 2H 2023

Super prime net face rental growth 4Q 2023

Capital City Summary

Melbourne
Vacancy rates in Melbourne rose to 1.6% in the second half of last year with greater availability of property, particularly in the city’s west where vacancy rates were at 2.9%1.

Demand in Melbourne has started to normalise and combined with higher vacancy, leading to only modest increases in rents through the quarter. Year-on-year, however, Melbourne recorded the highest growth in super prime rent of all Australian capitals, at 25.4%2.

Pre-lease activity accounted for less than 20% of floorspace leased in the December quarter, partly due to softening demand.

Land values have declined in some areas, with smaller lots in inner precinct locations suffering the largest drops. This can be attributed to high costs of debt and construction costs, as well as softening demand from tenants3.

Despite a modest increase in rents through the quarter, year-on-year Melbourne recorded the highest growth in super prime rent at 25.4%.

 

Sydney
Sydney’s industrial property vacancy rate rose slightly to 0.5% in the second half of 2023, but remains the tightest in the world4. As in previous quarters, rents continue to rise, although at a slower rate, and new supply is still being absorbed by pre-lease activity.

Some 62% of the supply pipeline for Sydney was added as delayed projects were completed. Over the full year, almost 1 million square metres was added to Sydney’s stock – almost double the long-run average5.

Super prime rents increased by 3.6% and prime rents increased by 2.9% over the fourth quarter, while secondary assets achieved only 2.2% growth, illustrating tenant demand for quality premises6.

Vacancy levels continue to remain at an all-time low. Globally, Sydney has the tightest vacancy rate of any city in the world at 0.5%.

 

Brisbane
As forecast7, increased development in Brisbane has lifted vacancy rates. Across the city, the average vacancy rate rose to 1.4% in the second half of 2023, while net absorption fell by more than 50%8.

Around 217,000 square metres of floorspace was added to the market in the December quarter, 43% more than the previous quarter9.

The increase in development may lift vacancy rates in the short term, according to Savills Research10, but in the longer term – out to 2027 – commentators are forecasting population growth and limited land availability will keep Brisbane rents rising.

Rents in Brisbane rose by an average of 2% in the quarter, CBRE data shows. Over the year, secondary grade properties  recorded the highest rental increases, with 18% growth, as a lack of availability forced occupiers to look  beyond super prime and prime assets11.

A lack of availability is forcing occupiers to look beyond super prime and prime assets, resulting in an 18% growth for secondary grade properties.


Source:
  1. CBRE (January 24, 2024), Figures Melbourne Industrial and Logistics 4Q23.
  2. CBRE (January 24, 2024), Figures Melbourne Industrial and Logistics 4Q23.
  3. CBRE (January 24, 2024), Figures Melbourne Industrial and Logistics 4Q23.
  4. CBRE (December 12, 2023), Australia's vacancy rate, continues to be the lowest globally.
  5. CBRE (January 24, 2024), Figures Sydney Industrial and Logistics 4Q23.
  6. CBRE (January 24, 2024), Figures Sydney Industrial and Logistics 4Q23.
  7. CBRE (October 9, 2023), Figures Brisbane Industrial and Logistics 3Q23.
  8. CBRE (December 12, 2023), Australia's vacancy rate, continues to be the lowest globally
  9. CBRE (January 24, 2024), Figures Brisbane Industrial and Logistics 4Q23.
  10. Savills Research (August 21, 2023) Shed Briefing: Australia Industrial Spotlight August 2023.
  11. CBRE (January 24, 2024), Figures Brisbane Industrial and Logistics 4Q23.
Chapter 5

Office

Hybrid work remains a hot topic

Others have suggested luring workers back may require more creative approaches ranging from fine dining1 to allowing pets in the office2.

CBD office vacancy rates increased from 14.2% to 14.9% in the December quarter, according to figures from JLL, reported in The Australian Financial Review3. But with a weakening labour market, some pundits argue employers will have greater power to increase office attendance4, which might lead to greater demand for office space in the longer term.

Tenants are still drawn to quality assets. Savills lists premium offices as a top investment pick for 2024, noting that in all CBDs, top-quality properties have experienced “resilient demand in the face of structural headwinds”5. Demand for these assets has allowed landlords to lift rents. For example, Sydney prime gross effective rent increased more than 7.5% in 20236.

High levels of supply relative to demand remain an issue for office property, but supply pipelines are dwindling in Brisbane and Sydney. Cushman and Wakefield notes vacancy rates could slip in those cities as supply is taken up through 20247. This could have flow on effects to rental growth and reduce incentives.

 

Andrew Turner

Founder and CEO

The future of hybrid work arrangements continued as a hot topic for discussion in the last quarter of 2023 with several major employers – including ANZ Bank, Suncorp Group and Origin Energy – introducing measures to drive staff members back into the office.


Source:
  1. Australian Financial Review (January 16, 2024), The secret to getting workers back into the office may be ... chefs.
  2. Ray White Commercial (November 28, 2023), Are pets the answer to reinvigorate workplaces?
  3. Australian Financial Review (January 23, 2024), CBD office vacancies highest since 1995.
  4. ABC (January 21, 2024), Is a full-time return to the office on the cards for workers in 2024 as employers gain 'more power'?
  5. Savills (December 6, 2023) Australian Commercial Real Estate Markets Spotlight on 2024.
  6. Cushman & Wakefield (December 13, 2023), Asia Pacific Office Outlook 2024.
  7. https://www.cushmanwakefield.com/en/insights/asia-pacific-office-outlook

Market Trends

Melbourne CBD
Vacancy rates in Melbourne continue to be the highest of the capitals, with negative net absorption of 71,200 square metres during 2023 as companies subleased office space and did not renew leases in the second half of the year1.

Just over 110,000 square metres of office space was completed in 2023 and a similar amount is expected in 2024. Around 70% of the 2024 stock will be premium grade and this quality uplift is expected to drive short-term rental growth2.

Average premium grade net face rents increased 5% year-on-year to $760 per square metre per annum, however net incentives also increased in the quarter to 43%3.

 

Sydney CBD
Only about 10,000 square metres of supply was added to Sydney’s prime office markets in 2023, versus 140,000 square metres in 2022, which created an oversupply relative to demand4.

An additional 270,000 square metres is expected to be added in 2024, although this is mostly pre-committed. Notable developments include 1 Elizabeth Street, which will deliver 72,500 square metres in the first quarter of 2024, all of which has been committed to by Macquarie Bank5.

Cushman & Wakefield notes the limit in short-term supply is allowing the office market to absorb some of the premium space that was completed in 20226.

Prime gross face rents were steady with 0.4% growth in the December quarter, while incentives remain elevated, particularly for lower grade properties7.

 

Brisbane CBD
Rents continue to rise in Queensland’s capital, with premium gross face rents up 8.5% year-on-year, while incentives range from 37% to 40%8.

Vacancy rates for prime grade offices are tightening and leasing enquiries have increased but factors such as high construction costs and delays in material delivery are holding developers back from embarking on new projects without significant pre-commitment9.

Only three developments are under construction in Brisbane and around 40% of that space is pre-committed. These developments include 205 North Quay, due for delivery at the end of 2024; 360 Queen Street due in the first half of 2025; and Waterfront Brisbane North Tower which is expected to complete in 202810.

With limited supply and growing demand, rents are likely to rise further while incentives are expected to trend lower.

18.2
%
Vacancy rate
for Melbourne CBD
Vacancy rate
for Melbourne CBD
14.4
%
Vacancy rate
for Sydney CBD
Vacancy rate
for Sydney CBD
11.1
%
Vacancy rate
for Brisbane CBD
Vacancy rate
for Brisbane CBD

Source:
  1. Australian Financial Review, Campbell Kwan, (January 23, 2024), CBD office vacancies highest since 1995.
  2. Cushman & Wakefield (January 22, 2024), Marketbeat: Melbourne CBD Office Q4 2023.
  3. Cushman & Wakefield (January 22, 2024), Marketbeat: Melbourne CBD Office Q4 2023.
  4. Cushman & Wakefield (December 13, 2023), Asia Pacific Office Outlook 2024.
  5. Cushman & Wakefield (January 22, 2024), Marketbeat: Sydney CBD Office Q4 2023.
  6. Cushman & Wakefield (January 22, 2024), Marketbeat: Sydney CBD Office Q4 2023.
  7. Cushman & Wakefield (January 22, 2024), Marketbeat: Sydney CBD Office Q4 2023.
  8. Cushman & Wakefield (January 22, 2024), Marketbeat: Brisbane CBD Office Q4 2023.
  9. JLL, (December 12, 2023), Brisbane's construction ‘dilemma’.
  10. Cushman & Wakefield (January 22, 2024), Marketbeat: Brisbane CBD Office Q4 2023.
  11. </