Trends shaping the future of Australia’s property market

Property is central to backing the capital management and growth ambitions of many businesses, so understanding what could shape the property market in the years to come is important for a long-term strategy. Here, we explore some of the key themes evolving in Australia.

Right now, both the residential and commercial markets have downside risks, as interest rates rise and cost pressures rattle consumer confidence. Many business leaders have property at the heart of their strategies – for example, they might own their own office space or use a residential property to secure finance – making pressure on asset values understandably stressful.

As we experience a downturn, history can again be a useful guide. For Grant Robson, Head of Professional Services at Macquarie Business Banking, it’s those who lose sight of the long-term that suffer when markets stumble.

“The temptation to react and move with the crowd nearly always results in a less-than-ideal financial outcome,” says Robson. “Those are the times you see people buy at the peak and sell at the floor.”

Moving with a cycle is reactionary, whereas moving with the times is strategic. What drives property markets – their social, demographic, and economic underpinnings – are key themes to consider in the context of a buying or selling decision. 

01

The future of office: it pays to be prime

For those business leaders who own or are considering owning office space, there is some pre-pandemic context to consider. Importantly, businesses have been thinking about how much space, and what type of space, they’d require to support a hybrid workforce for many years.

This means the shift towards flexible work should be seen as a long-term trend, rather than one that was brought about by enforced lockdowns.¹ The office market is catering to this structural shift, and prime assets which attract and support a hybrid workforce look poised to capitalise.²

Some of the key markers of prime, attractive office space in this environment include tech-enabled and collaborative fit-outs, which seamlessly support co-working. The wellness and environmentally friendly attributes of a workspace are also growing in importance, in line with social expectations.

“Great office space will continue to serve business and commerce as an environment to build relationships, exchange ideas and learn from each other. This has been the life blood of cities throughout history,” says Anthony Henry, Head of Workspace Design at Macquarie Group.

For businesses interested in or currently holding office space, their attention may be better fixed on the utility of an office space, rather than whether it’s redundant. For example, business leaders could shift their focus about an office space from how many people it can accommodate, to does it support collaboration, culture and performance?

“It’s not just about costs, it’s not about giving up office space, it’s a matter of how flexible it needs to be,” says Robson. “The question now is: how do you reposition for this workforce?”

02

The economy: a marathon, not a sprint

The strength of the Australian economy underpins the strength of the commercial property market. Its relative resilience is an important point to remember – and monitor – for commercial property owners.

There are currently near-term risks and challenges to the downside, particularly as interest rates rise, and cost pressures for individuals and businesses persist. However, as it stands the current cycle doesn’t have the hallmarks of a major downswing for the commercial market. In many ways, the sector is systemically stronger than during other downturns, says David Roberts, Associate Director at Macquarie Asset Management, Real Estate.

“No two downturns are the same, but there are some good things to consider - the Australian banks have been cautious in providing finance to commercial real estate investors and developers, which means we have not seen the sharp rise in credit and development activity that we have seen in previous cycles. This means when interest rates do rise, the majority of investors and borrowers will be well positioned to be able to absorb them and continue to service their debts,” he says.

That said, investors are understandably cautious on the outlook at the moment, as they wait to assess where pricing sits as we move through this current cycle. In this context, the message to worried business and property owners is to take a long-term view as conditions tighten.

“The cash rate will peak, before we potentially start to see a recovery in the market thereafter,” says Laurence Hart, National Head of Property Lending at Macquarie Business Banking. “So, it’s going to get worse before it gets better, but we aren’t expecting stagnant territory for years and years.”

03

Sustainability: ‘green’ buildings in demand

As a collective, the commercial market is sending a clear message: the environmental, social and governance (ESG) credentials of a property are a drawcard and in the years to come, will be a benchmark expectation.

Institutional investors are often a barometer for trends in the commercial market. Buildings with ‘green’ credentials were a priority in several major commercial office transactions last year, and some of the world’s top sovereign wealth and super funds have listed ESG as one of the key drivers in their decision making, according to global real estate services firm, CBRE.³

Though there isn’t broad consensus on the dollar value that ESG credentials give a property, studies suggest they are a positive for value. For example, one recent global study estimates an 8-18% sales price premium for green-rated buildings.⁴

“A combination of top-level investor pressure, risk mitigation, regulatory changes, and the search for outperformance by investors is driving forward the demand for sustainable real estate around the world,” the study also says.

Finally, consumers have become savvy about the wellbeing and environmental benefits of cleaner cities, meaning the social pressures for ESG-friendly spaces are likely to persist. For business owners, this is worth considering in terms of what employees might increasingly expect in years to come.

“The occupants of our cities are increasingly focused on the environmental impacts of poor development and badly performing assets. People want to work in buildings that have minimised their carbon footprint through all phases of the asset lifestyle,” says Henry.

Resources for building owners are available as this evolution continues, including this guide from the Australian government on factors to be aware of when investing in and managing an energy efficient premises.

01

Greener homes: evolving to new conditions

The residential market, like the commercial one, is also being shaped by an increased focus on sustainability. Research into the impacts of climate change on housing is fragmented, but presents a common theme: extreme weather events and continued warming presents risks to the livability of some areas, the resilience of existing structures, and asset values.

For example, one estimate shows the property market could lose $571 billion in value by 2030 due to climate change and extreme weather and will continue to lose value in the coming decades, should emissions remain high.⁵

The Reserve Bank of Australia also fears material declines in housing prices for certain regions and notes the risks of rising insurance premiums, making the cost of servicing a property substantially higher.^{6 7}

Though there isn’t a consensus view on precisely which areas and what types of housing will be most impacted, the effects of climate change on the built environment, and the readiness of properties to cope with it, are among the most pressing issues to monitor for property owners. This is especially the case for those in, or even close to, areas prone to disaster such as floods and fires.

According to Simon Kuestenmacher, Co-Founder and Director at The Demographics Group, risks are likely to be priced into the market, and he particularly fears for lower-quality developments that aren’t primed for tougher conditions.

In more positive news for business leaders with an interest or assets in the residential property market, there are tools and guides within reach to prepare housing assets, and the take-up of certain strategies is increasing.

For example, Australia is a global leader in rooftop solar. Data shows more than 2.68 million rooftop solar power systems have been installed in Australia, meaning one in four homes have solar panels on their roof.⁸

“I think smart operators are also looking at sustainability as a means to increase the value of their property,” says Lisa Kearney, Head of Property Services at Macquarie Business Banking.

“As sustainability gets more and more traction and more focus and importance in economies worldwide, buyers and renters are going to expect properties to have a certain level of energy efficiency, for example. If that’s not there, the property can become less competitive in the buyer and rental market.”

02

Demographic shifts: the Millennials move in

In Australia, residential property ownership is part of the national psyche, and this is reflected in wealth creation and business strategies. By extension, understanding the future of the residential market is a critical component of business success for many.

“Business owners are in business for many purposes, one of which is to improve the wealth and lives of themselves and their families. Fundamental to that, and to human satisfaction, is the concept of ‘abode’ - where do you live, how do you take shelter?” says Robson.

“I can’t see any time soon this Australian love affair with residential property ending - I think it’s going to stay fundamental to many business owners’ long-term goals,” he adds. 

Where Millennials choose to live and own property is key to understanding its future profile, as they are poised to outpace Baby Boomers as our biggest generational group.⁹

With comparatively higher financial pressures and barriers to entry for home ownership¹⁰, Millennials save some of their adult milestones for later in life. Now, with many at family formation stage, Kuestenmacher sees that this cohort is making its way to the outer suburbs and urban fringe in search of space and a higher bedroom count.

"They are moving to wherever they are affordable and available. These houses are not available in the inner city, so they can’t stay in their current locations,” he says.

Overall, the Australian population also continues to grow, increasing 8.6% between 2016 and 2021.¹¹ The residential housing mix in Australia is evolving in tandem, with a sustained increase in high-density developments – such as apartments – supporting growing housing demand.¹²

"For example, in Sydney where, the land values have gone up so much, it’s making sense to make more efficient use of that land by building up,” says Justin Fabo, Senior Australian Economist at Macquarie Group. "My hunch is that trend hasn’t changed, it’s very difficult to think unless we have a huge recession, that the value of land will plummet sufficiently to make that trend go away."

According to Kearney, these trends are important to keep an eye on for a longer-term property strategy.

“Forward thinkers are going to look at what’s going to happen in the next 5, 10 and 20 years as the landscape expands,” she says. “Growth opportunities can present themselves in different areas, driven by new places people are both living and working.”

03

The economy: the key decider

Though we often speak about the Australian residential market as one and in averages, the reality is, the growth story for our major capital cities has been different over time. In the last decade, for example, Sydney and Hobart have led charge on growth, but Perth and Darwin have been at the back of the pack as they dealt with fallouts from the commodities boom.

However, there are common threads from the growth tales of each of these distinct locales that remind us of what will always underpin residential markets: the state of the economy.

"Over long periods of time, there's two key drivers of housing prices. It's interest rates and income,” says Fabo.

“Interest rates are the same everywhere, so broadly have the same impact on housing everywhere,” he says. "But income growth is not the same for everybody and that’s typically where you get the differences in medium-term housing growth,” he says.

“For example, if we use history as a guide, the rate of decline in dwelling prices keeps speeding up until mortgage rates stop rising. Then in the past, when mortgage rates have stopped rising, the rate of decline in dwelling prices starts to slow,” he adds.

As prices decline in this current environment, for Robson, one of the most important lessons history can teach business and property owners when the economy is challenging is: lead with logic, not emotion.

“There is so much frictional cost involved in buying or selling a property in Australia,” Robson says. “Chopping and changing can create bigger problems.”

Business strategies and wealth creation are typically viewed through a long-term lens, so it follows that the core assets underpinning them should be viewed in the same way. As conditions tighten and the downward cycle progresses, this is an important consideration to keep front of mind.

“I would say to business owners right now: if you’re considering selling, ask yourself deep down, why? During pressured times, these decisions are often made on sentiment, whereas data needs to be in the forefront,” says Robson.

"Do the real financial analysis, rather than letting your psychology lead the way,” he adds. “Think long term - why did you buy in the first place, is the strategy still valid? If so, be patient.”