Research Briefing | Nov 2, 2023

Is Australian office property a bad investment? That depends on timing

There is no shortage of negative news surrounding the office property sector in Australia at present which is facing challenges on several fronts. Chief amongst these challenges is the strength of occupier demand, which is being buffeted by slowing economic and employment growth as well as the impact of many businesses using hybrid working arrangements and, in doing so, cutting back on office space requirements.

This research report expands on the following points:

  • The office sector in Australia is facing several headwinds, including reduced demand from hybrid working arrangements, slowing economic and employment growth, and rising bond rates and yields. However, it may still present an attractive cyclical investment opportunity with astute timing and management of vacancy and incentive risks.

  • Office yields have further to soften in response to rising bond rates, and capital values have further to fall. We forecast peak (June 2022) to trough (June 2024) yield softening of 110 to 130 bps across the major markets, triggering a -8 to -20% setback to average capital values.

  • Near term capital values falls flow through to low 5 year prospective returns for office property investments made now. However, medium to long term forecast market recoveries lead to much higher returns if investment entry is delayed 12 months or viewed over a 10 year horizon.
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