Investors are now in the process of recalibrating risk-return expectations, a strategic move that is being carried out with a heightened focus on deploying capital to drive returns through targeted income growth strategies, with greater resilience in ‘beds’ (residential and select hospitality), ‘sheds’ (industrial), ‘tech’ (data centres), retail and centrally located prime offices.

Liquidity is expected to improve in 2025 amid growing pressure to deploy capital. However, the ongoing slide in fundraising activity points to a gradual recovery as investors shift focus to value-added and opportunistic strategies.

Investment market recovery gains momentum

The outlook for 2025 appears promising for capital markets, driven by a recovery in economic growth and improving sentiment. Despite recent volatility in bond markets, conditions favour a recovery in investment markets. The S&P/ASX 200 REITs index has climbed more than 40% since October 2023, regaining all losses incurred since the rate tightening cycle commenced in 2022.

REITs' share prices point to property market recovery

ASX 200 and S&P 500 REITs indices, January 2022 = 100

Source: Savills Research, Macrobond

Return to Capital Growth

Commercial property markets are reaching a cyclical bottom, with declines in capital values easing across major sectors. Office capital values fell by 1.6% in Q3-2024, but the industrial, retail, and hotel sectors recorded only slight declines. The stabilisation of asset values is expected to drive a recovery in investment markets, with a return to capital growth anticipated in 2025.       

Improving Liquidity amid growing pressure to deploy capital

Asset repricing and the prospect of a new growth cycle are unlocking transaction activity. Global deal activity is turning a corner, with 2024 volumes expected to be slightly higher than 2023, and further improvement anticipated in 2025 and beyond. According to RealfinX, around US$750 billion in unallocated capital is sitting in global closed-ended funds targeting real estate. While this is 2% below 2023 levels, dry powder remains well above the 10-year historical average of c.US$430 billion.

Investor Focus on Value-Add Strategies

Although liquidity is on the rise, fundraising activity is only seeing gradual improvements. As per RealfinX, closed-ended real estate funds amassed US$113.6 billion by September 2024, a 25.4% decrease from 2023. Despite this overall downturn, value-add strategies experienced an 18% increase in fundraising, now representing 36% of this year's total, up from 27% during 2015 to 2019. This growth has primarily come at the expense of Core/Core+ strategies, which have seen a 63% reduction in fundraising this year, and opportunistic strategies, which continue to attract 27% of the capital raised.

Super-sized funds to reshape capital markets

Superannuation and pension funds are set to play an increasing role in commercial property capital markets. This activity is being underpinned by rapid growth in assets under management and portfolio repositioning towards assets benefitting from long-term structural tailwinds such as data centres, industrial & logistics, and residential.