Australia’s commercial property market is entering a more selective phase as investors reassess risk following the sharp rise in global interest rates and the repricing of real estate assets.
Tighter financing conditions and shifting tenant demands are placing greater emphasis on asset quality, income durability and active management.
Commercial property markets are shifting as investors track performance, risk and asset quality. iStock
The result has been a widening gap between assets seen as resilient and those viewed as more vulnerable to changing economic conditions.
Institutional investors that previously allocated heavily to parts of Asia’s emerging economies are increasingly redirecting capital towards markets perceived as stable and transparent.
Jason Huljich, joint chief executive of Centuria Capital Group, says this shift is favouring Australia, which has become increasingly attractive to global investors because of its structural advantages.
Advertisement
“Australia has a transparent title system and pricing environment. It also has a very stable economy, which is something institutional investors value highly,” he says.
Jason Huljich, joint chief executive of Centuria Capital Group.
With many global investors scaling back exposure to China and other developing markets in Asia, the region’s more stable economies are now coming into their own.
“Five to eight years ago, a lot of the capital was going into China and emerging markets like Vietnam, but in the last few years investors have definitely narrowed their focus to Japan and Australia. Institutions have become much more risk-averse.”
These investors have remained active across a broad range of property sectors, including build-to-rent housing, student accommodation and industrial assets. Office investment has also begun to re-emerge as global capital returns to the market.
Huljich says offshore investors typically follow a predictable pattern when allocating capital across Australian cities for office investment.
“When the cycle turns and money starts coming back into the country, it almost always goes to Sydney CBD first,” he says.
“As opportunities there tighten, investors start looking more broadly. First to North Sydney, then typically to Melbourne, followed by Brisbane and eventually markets such as Perth, Adelaide and Canberra.”
This cycle has broadly repeated in the current market recovery, although Melbourne has attracted less offshore capital than in previous periods.
Huljich says Victoria’s additional property taxes for foreign investors weighed on the state’s relative appeal.
“Those taxes definitely affect the returns on property investments in Victoria,” he says. “As a result there’s been very little offshore investment going into Melbourne compared with previous cycles.”
Instead, international investors have remained heavily focused on Sydney, with some capital beginning to move towards Brisbane.
With international capital returning, investor behaviour has also become noticeably more discriminating. Rather than seeking broad exposure to property as an asset class, investors are focusing more closely on the underlying fundamentals of individual assets.
Craig Armstrong, a certified financial planner at Coral Coast Financial Planning, says the shift has sharpened the way advisers assess property investments within client portfolios.
“Higher interest rates and rising cost pressures are exposing weaker balance sheets on marginal property assets, which is separating quality from the mediocre,” Armstrong says.
“We spend more time looking through the fundamentals – the tenants, lease lengths and whether the manager has the experience to navigate tougher cycles.”
Craig Armstrong, certified financial planner at Coral Coast Financial Planning.
The shift reflects a broader repricing that has swept through global real estate markets since central banks began lifting interest rates in 2022 to combat inflation.
Higher borrowing costs have pushed up required investment returns, forcing buyers to reassess asset values and making income stability a more critical factor in underwriting property deals.
Those same considerations are shaping institutional investment decisions, Huljich says, particularly in sectors such as office where the pandemic accelerated changes in tenant behaviour.
“Location, asset quality and tenant covenant are the three things investors are really focused on,” he says.
For property landlords, that has placed greater emphasis on understanding tenant needs and maintaining closer operational oversight of buildings.
Centuria manages about $22 billion in real estate assets across listed and private funds spanning office, industrial, retail, healthcare, data centres, agriculture and real estate credit. Huljich says maintaining direct relationships with tenants helps managers respond more quickly to changing requirements.
“Most want higher quality space now. If they’re asking employees to come back into the office, they want buildings with the right amenity, location and facilities,” he says.
As capital adjusts to the higher-rate environment, Huljich believes commercial property is entering a more disciplined investment phase.
Rather than relying on broad market momentum, investors are increasingly focused on the fundamentals of each asset – tenant strength, location and the quality of management behind the portfolio – as they reassess how risk is priced across the sector.
That shift has also reinforced the importance of transparency when communicating with investors during more volatile market conditions.
“The one thing investors don’t like is surprises,” Huljich says.
