RESEARCH INSIGHT ROTATING TO RECOVERY AND RESILIENCE - Knight Frank
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RESEARCH INSIGHT ROTATING TO RECOVERY AND RESILIENCE
Written by Knight Frank Australia’s Read the 2022 Outlook Report Research and Consulting Team including: digital publication online now. Ben Burston knightfrank.com.au/2022outlook Partner, Chief Economist Michelle Ciesielski Partner, Head of Residential Research Jennelle Wilson Partner, Research & Consulting Chris Naughtin Director, Research & Consulting Katy Dean Director, Head of Industrial Research, Research & Consulting Contributing Authors: Suzanna Murray Director, Occupier Services, New South Wales Sean Lucas Director, Client Solutions & Flexible Real Estate Lead Design, Illustration and Production: Daniel Terry Associate Director, Creative Services Specialist KFACreative.com.au Marketing and Communications: Tammy Clinch Associate Director, Corporate Brand Marketing
Introduction
Economy and forecasts:
Rotating to
recovery
Investments:
Rotating to
resilience
Industrial:
Responding to supply
chain disruption
Workplaces:
Contents
Transitioning
from resilience to reassessment
Residential trends:
Robust
04 08 18 26 36 48
PAGE PAGE PAGE PAGE PAGE PAGE
residential
Introduction By Ben Burston Knight Frank Australia.
After two years of persistent disruption to lives and
livelihoods, 2022 begins with the expectation that the
worst of the pandemic has passed and prospects for a
return to growth. A wide range of indicators now point
to economic recovery, with employment returning to
growth, businesses aggressively seeking to hire, wages
starting to rise and confidence rapidly growing across
the economy as consumers prepare to unleash a
post-lockdown spending spree.
This shift to expansion mode will help drive In residential markets, buyers are also
property markets over the next 12 months responding to the sustainable living agenda
and cyclical recovery will ensue in markets and are tilting to homes and apartments
most impacted by the demand-side that offer energy efficiency and wellness
uncertainties. But while the red lights on the attributes, while the ending of restrictions is
dashboard are quickly switching to green, also triggering renewed interest in city living.
enough has already changed over the course
of the pandemic to know that we are in for a Each of these behavioural shifts
period of accelerated change, motivated by has important implications for property
the rapidly evolving needs and wants of the performance and the market is adapting
businesses and consumers that underpin rapidly as investors seek to boost
property demand. exposure to new opportunities
while ensuring resilience to
This is nowhere clearer than in industrial the challenges that some of
and logistics markets, where supply chain them entail. Just as the economic
disruption at a time of rising consumer downturn saw divergent market
demand globally has highlighted the fragility outcomes, so too will the
of just‑in‑time distribution strategies. This recovery phase. Against this
is causing a reassessment of required backdrop, our 2022 Outlook Report
inventory levels and a scaling up of seeks to identify the sectors aligned with
distribution capacity and hence long-term behavioural change, some of the locations
space needs. best positioned to capture growth and the
asset characteristics that will best respond to
Meanwhile, office occupiers are adapting to customer demands.
the challenges and opportunities of hybrid
working while beginning an assessment of
long-term needs. Early fears of widespread
downsizing are looking misplaced, but the
form and function of offices will adapt in
response to myriad pressures including the
increasingly prominent Environmental Social
Governance (ESG) agenda.
2022 O U T LO O K R E P O R T -5-
Top 10 predictions for
1 Strong economic recovery in
2022 driven by pent-up
consumer demand
3 Pent up demand will drive office
leasing market recovery
With persistent lockdowns and huge uncertainty during 2020
and 2021, many businesses bought time by deferring major
Pent up consumer demand will drive a renewed V-shaped
decisions on their office space, instead taking short term lease
economic recovery, with spending on services expected to
extensions and in most cases opting to remain in their current
grow particularly strongly. Household savings have been
space until they have greater clarity on future space needs.
substantially boosted by government income support and
Looking ahead, with prospects for a robust economic recovery
weaker services spending during lockdowns, while consumer
and rising employment, the scene is set for the release of
confidence has been much less adversely impacted by the
pent-up demand which will help boost absorption rates and
Delta outbreak compared to the onset of the pandemic in early
drive market recovery in 2022. This recovery will take place
2020. Stronger labour market conditions will also contribute to
notwithstanding an ongoing debate on workplace dynamics,
consumer demand with very high job vacancies pointing to a
and while there is no evidence of widespread downsizing these
quick recovery in the labour market as the economy reopens,
pressures will mean that absorption is unlikely to rebound quite
and this will feed through to rising business sentiment and
as strongly as it has in previous recoveries in the early 90s and
create a favourable backdrop for property.
Top 10 predictions for
post GFC period.
2 Negative real interest rates will
keep property yields low
Growth in headline inflation has increased significantly over the 4 Unrelenting demand for service,
experience and amenity will
past year, driven by pent-up demand, supply chain bottlenecks, reshape office markets
and higher commodity and energy prices. Higher inflation has
While the office remains central to the workplace experience,
led to an increase in inflation expectations, albeit from very
the so-called SEA change – Service, Experience and Amenity
low levels, and prompted many financial market participants
– will be firmly in focus for businesses when making decisions
to ponder whether central banks will be forced to remove very
on their space needs going forward. This inexorably points to
accommodative monetary policy more quickly than previously
the need to many tenants to upgrade their office space, and
anticipated. While this has fed through to rising nominal bond
as such we expect premium and upper A grade space to be at
yields, real interest rates have continued to fall and are well
the forefront of the resurgence in demand with more generic
below zero. A negative real interest rate environment only
space less likely to be perceived as the compelling office of the
serves to increase the appeal of real assets and we expect
future. With vacancy rates likely to remain elevated for some
negative real yields to further increase demand for property
time, lower quality secondary assets will need to be upgraded
from a wide range of capital sources.
or risk accelerated obsolescence.
5 Focus on supply chain
resilience will continue to
drive industrial demand
While growth in e-commerce continues to be the stalwart
behind the demand for industrial and logistics real estate, the
pandemic has exposed widespread supply chain vulnerability
and these pressures will continue to drive demand in 2022.
Many companies simultaneously wish to expand their
warehouse facilities to enable higher inventory levels and cater
to rising consumer demand and there has been a scramble for
space. Demand for modern stock is well and truly outpacing
supply and this will see the market remain tight.
-6- KNIGHT FRANK RESEARCH INSIGHT
6 Industrial rents (finally)
shifting into growth mode
With so much positive momentum in industrial markets it is
9 Investors rotating into build-to-
rent and other specialist sectors
through build‑to-core strategies
easy to forget that rental performance has been distinctly Investors are continuing to shift their investment allocations
underwhelming in recent years. However, after a long wait, towards operational real estate sectors such as data centres,
the dynamic is now shifting with multiple drivers combining to medical facilities, build-to-rent, seniors housing, and student
put upward pressure on rents. Strong and sustained demand accommodation. The share of these alternative sectors has
has pushed down vacancy of existing stock, widespread accelerated markedly since the onset on the pandemic,
shortages of zoned and serviced land are pushing up representing 35% of investment volume globally in 2021, up
land values, while supply constraints and higher costs are by nine percentage points compared to the average over the
impacting new developments. These signals all point toward five years to 2019. With limited established stock, the rotation
solid rental growth in 2022 and 2023. This will be led by is largely occurring through build-to-core strategies, led by
Sydney and Melbourne, but Brisbane, Perth and Adelaide are build-to-rent. Multiple large-scale developments are now
not far behind and will also see a strong uplift. under way and plans continue to take shape for a sustained
pipeline of activity across the country, with Melbourne
emerging as the focal point for new activity.
7 Rising residential buyer
demand for sustainable living
For many prestige residential buyers, reducing their
environmental footprint is a growing aspiration. When asked
about a future residential purchase, three-quarters of
10 The green premium will become
more evident as investors adopt
net zero portfolio targets
Australians say the energy efficiency of a home is important
(48%) or very important (26%) to them. In addition, health and Hedonic price modelling of office investment sales over
wellbeing are also key considerations, with proximity to green the past decade reveals that Sydney and Melbourne office
space, air quality and a good outlook with a view of the ocean, buildings with a NABERS Energy rating of up to 4.5 stars
mountain range or skyline the key factors in determining benefit from an 8% premium on sales price compared to
locational choice. The rise in importance of sustainable living unrated buildings, while those with very high ratings of 5, 5.5
presents a significant opportunity for developers to evolve or 6 stars enjoy an 18% premium. Importantly, the analysis
and differentiate their offer and this will increasingly shape allows for the fact that several other factors influence price
building design. and is an estimate of the specific impact of the NABERS
rating. Going forward, the importance of energy efficiency
and its impact on building values can only be expected to
8
increase as more and more tenants and investors adopt
Paucity of prestige apartments specific environmental targets for their own real estate
as cities mount a comeback activities.
The ‘race for space’ has grabbed headlines globally but cities
look to be mounting a comeback, with demand on the rise
for city apartments and vacancy rates in rental markets now
falling. Against this backdrop, concerns over looming under-
supply are mounting. The total number of apartments in low-
rise, mid-rise, and high-rise projects averaged 26,040 a year,
across Australia’s major cities since 2015. This is expected
to fall by 39% over the next three years, driven by declines in
Sydney, Melbourne and Brisbane, pointing to a strong outlook
for price growth in the prestige apartment market.
2022 O U T LO O K R E P O R T -7-
Economy and forecasts: Rotating to Recovery By Ben Burston and Chris Naughtin Knight Frank Australia.
Macro
Strong economic recovery in 2022
driven by pent-up consumer demand
The Australian economy will rebound strongly Pent up consumer demand will drive
next year following the lifting of restrictions the recovery, with services consumption
on economic activity in NSW, Victoria, and expected to grow particularly strongly.
the ACT, and the reopening of Australia’s Household savings have been boosted by
domestic and international borders as government income support and remains
vaccination rates reach very high levels. high at 9.7% of disposable income, well
Following a large contraction in Q3, output above the 4.8% average over the past
has begun to rebound in Q4 and we expect 25 years. Consumer confidence has been
momentum to strengthen sharply in the first much less adversely impacted by the Delta
half of 2022. Oxford Economics expects outbreak compared to the onset of the
GDP to grow by 4.3% in the first half of next pandemic in early 2020. Stronger labour
year and by 3.9% for the whole of 2022 market conditions will also contribute to
in annual average terms over the year to consumer demand. Higher job vacancies
December 2022. point to a quick recovery in the labour market
as the economy reopens, with job ads rising
by 10.2% in October to be 51.3% above
pre-pandemic levels, with particularly
strong gains in lockdown-impacted
states and industries.
Australia GDP growth
10%
8% Quarterly Year on year
6%
4%
2%
0%
-2%
-4%
-6%
-8%
Mar 18 Dec 18 Sep 19 Jun 20 Mar 21 Dec 21 Sep 22 (f) Jun 23 (f)
Source: Knight Frank Research, Macrobond, Oxford Economics
Rapid global growth
will extend into 2022
The pace of economic growth has started to IMF GDP growth forecasts
slow in major economies following the sharp Percent (%) change
V-shaped recovery earlier this year. The US 9%
2021
and China look to have achieved peak growth 8%
in Q2 2021, while the Euro area and Japan are 2022
7%
likely have reached their respective peaks in
Q3 and Q4. Despite slowing, global growth 6%
will remain above trend next year supported 5%
by an ongoing acceleration in services
spending, which in many economies remains 4%
well below pre-pandemic levels. The IMF’s 3%
October World Economic Outlook predicts
2%
that the global economy will continue to grow
strongly, with GDP rising by 4.9% in 2022 1%
following 5.9% growth in 2021. 0%
ina UK nc
e US rld ly ain da a alia an
y
pa
n
Ch Wo Ita Sp na are str
Fra Ca ro Au
rm Ja
Eu Ge
Source: Knight Frank Research, IMF
2022 O U T LO O K R E P O R T -9-
Inflation outlook: Cost pressures rising but long-term
structural disinflationary forces remain intact
Headline inflation
Growth in headline inflation has increased Headline
Percent (%)inflation
change year on year
significantly over the past year, driven by Percent (%) change year on year
6%
pent-up demand, supply chain bottlenecks, 6% Australia
and higher commodity and energy prices. Australia
Higher inflation has led to an increase in 5% US
inflation expectations, albeit from very low 5% US
UK
levels, and prompted many financial market 4% UK
participants to ponder whether central banks Euro area
4%
Euro area
will be forced to remove very accommodative
monetary policy more quickly than previously 3%
anticipated. 3%
Headline CPI in Australia rose by 3.0% over 2%
2%
the year to September, while in the US, the
Federal Reserve’s preferred measure of 1%
inflation increased by 4.1% over the same 1%
period, with even stronger growth in the CPI
equivalent, although growth in underlying 0%
0%
Ro t ating to re covery
inflation remains much more subdued.
-1%
-1%
-2%
-2%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Source: Knight Frank Research, Macrobond
Source: Knight Frank Research, Macrobond
Wage growth remains subdued in Australia,
limiting the risk of a sustained period of high inflation
A key factor in driving demand inflation is Wage growth
wage growth. While labour markets in many Wage growth
Percent (%) change year on year
advanced economies have experienced a Percent (%) change year on year
5.0% Australia
strong rebound, employment remains below 5.0% Australia
pre-pandemic levels. Consequently, while 4.5% US
overall wage growth has strengthened 4.5% US
significantly from pandemic lows, it remains 4.0%
at sustainable levels. Indeed, wage growth 4.0%
remains particularly low in Australia (as it was 3.5%
in years before the onset of the pandemic), 3.5%
growing by 2.2% over the year to September,
3.0%
compared with 4.2% in the US. While wage 3.0%
growth has picked up, it remains below
2.5%
average and the reopening of Australia’s 2.5%
international border will eventually increase
2.0%
the nation’s labour supply and again exert 2.0%
downward pressure on wage growth.
1.5%
1.5%
1.0%
1.0%
0.5%
0.5%
0.0%
0.0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Source:2007 2008
Knight Frank 2009 Macrobond
Research, 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Source: Knight Frank Research, Macrobond
- 10 - KNIGHT FRANK RESEARCH INSIGHTRise in inflation largely driven by supply-chain
disruption rather than demand factors
A significant proportion of the increase in Cost inflation
inflation is transitory, resulting from large base
effects – comparison with prices from the
previous year that were abnormally low, for Commodity Percent (%) change year on year
example, oil prices – and rising prices in
heavily pandemic impacted industries (such
aviation and hospitality) as they resume
Brent crude oil 107%
operations.
Coal (Australia) 306%
Higher cost inflation is also a key factor
driving up prices such as COVID-related
supply chain disruptions, which is driving
Natural gas (US) 144%
prices for many inputs in production upwards,
and rising energy and commodity prices Natural gas (Europe) 535%
(such as oil, electricity, gas, and thermal coal),
as well as shipping prices. While cost inflation LNG (Japan) 100%
will ease eventually, major central bank heads
have recently said inflation could be more Aluminium 62%
persistent than they had previously
anticipated. However, in setting monetary
policy, central banks are principally
Copper 46%
concerned with persistent demand-driven
inflation, given monetary policy’s ability to Lead 32%
influence aggregate demand, and will be less
responsive to cost inflation unless it begins to Tin 108%
drive inflation expectations materially higher.
Nickel 27%
Zinc 38%
Baltic Dry Shipping Index 127%
Source: Knight Frank Research, The World Bank
2022 O U T LO O K R E P O R T - 11 -Bond yield outlook: Rates rising but yields
will remain low during the recovery phase
Reflecting the ongoing recovery in economic central banks begin tapering asset counterproductive as is it would dampen
activity and higher inflation expectations, purchases. However, interest rate increases demand but do nothing to address the cost
government bond yields have risen from are a separate and distinct policy tool from inflation pressures that are the predominant
pandemic lows. US 10-year Treasury yields asset purchases. The RBA has indicated it driver of higher inflation.
rose from around 0.5% in mid-2020 to spike will be a long time before they begin raising
Despite the rise in nominal bond yields,
at 1.7% in March this year, before falling back rates and currently the central bank expects
real yields continue to fall and are well below
to around 1.2% mid-this year as the Delta to remain on hold until 2024. The US Federal
zero. Real yields on 1-year US Treasuries fell
variant interrupted the recovery, and a similar Reserve expects to begin raising interest
to -4.3% in September, the lowest level
trend was evident in Australian government rates earlier, with half of Federal Open Market
since the mid-1970s when inflation rates
bond yields. Reflecting the higher vaccination Committee members expecting at least one
were in the double-digits, while the
rates in advanced economies supporting rate rise next year, while a majority of FOMC
Australian equivalent is -3.0%, also the
expectations of ongoing above trend growth members expect the federal funds rate will
lowest level since the 1970s. This
and higher inflation, bond yields have begun be at least 50bps higher than current levels
environment increases the appeal of real
to rise again to around 1.8% as central banks by the end of 2023.
assets such as property and we expect
begin to taper asset purchases and market
Despite taking the first steps to tighten negative real yields to generate stronger
participants anticipate policy rate increases.
policy, central banks will maintain a very demand for property assets.
While we expect bond yields to remain at accommodative monetary policy by historical
Ro t ating to re covery
relatively low levels, there is the potential for a standards, which will keep bond yields
further rise in bond yields and a temporary anchored at relatively low levels. One reason
spike as seen in early 2021, particularly as for this is that higher interest rates would be
10-year government bond yields Real bond yields
Percent (%) Percent (%), 1-year government bond yield less annual headline infation
3.0% 5.0%
Australia Australia
US US
4.0%
2.5% UK
Germany
3.0%
2.0%
2.0%
1.5%
1.0%
1.0% 0.0%
-1.0%
0.5%
-2.0%
0.0%
-3.0%
-0.5%
-4.0%
-1.0% -5.0%
06
07
08
09
10
11
12
13
14
15
16
17
18
19
20
21
Jan 19 Jul 19 Jan 20 Jul 20 Jan 21 Jul 21
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
Source: Knight Frank Research, Macrobond Source: Knight Frank Research, Macrobond
- 12 - KNIGHT FRANK RESEARCH INSIGHTInvestment
Total returns: Offices to pick up
in 2022, as industrial slows
outlook
Commercial property asset performance has performance of individual office assets may
begun to rebound from the downturn seen vary in the medium term based on tenant
in 2020, with the impact of low interest rates risk. We expect average capital growth to
and yield compression generally outweighing slow to 3.2% in 2023 reflecting a slowdown
the higher income risks for some sectors in yield compression and the rising risk of
and assets arising from the pandemic. higher interest rates globally, with total returns
Capital growth for a broad range of Australian slowing to 7.5%.
commercial property assets tracked by
Average capital growth for industrial property
MSCI rose by 3.3% in the first nine months
is expected to slow from the elevated levels
of 2021 compared with -4.4% in 2020. The
the sector is currently experiencing but
turnaround has been driven by exceptionally
remain strong, underpinned by sustained
strong capital growth for industrial assets
demand for logistics assets. Capital growth
over the period (+12.8%), while office capital
has accelerated sharply this year and is
values are rebounding from their slight fall in
expected to average 15.2% over the year,
2020 (+2.4%) and retail asset values have
up from 7.8% in 2020, and total returns will
remained steady after large falls in 2020.
surpass 20%. Capital growth at this pace is
For the office sector, we expect average unsustainable, and growth in capital values
capital growth to strengthen to 3.3% in is expected to slow to 6.0% and 4.0% in
calendar year 2021, and 5.3% in 2022, 2022 and 2023 respectively, notwithstanding
with total returns rising to 7.9% and 9.7% the strong structural tailwinds benefitting
respectively. Stronger capital growth the logistics sector. As the prolonged cycle
will be underpinned by ongoing yield of yield compression abates, particularly
compression. However, while occupier in Sydney and Melbourne, rental growth is
market conditions are expected to improve, expected to take over as a more important
the long-term impact of the pandemic on the driver of returns.
leasing market remains uncertain and the
Total return for office property
Percent (%) change year on year
16% Capital growth
14% Income return
12% Total return
10%
8%
6%
4%
2%
0%
-2% 2015 2016 2017 2018 2019 2020 2021 2022 (f) 2023 (f)
Total return for industrial property
Percent (%) change year on year
25%
Capital growth
Income return
20%
Total return
15%
10%
5%
0%
2015 2016 2017 2018 2019 2020 2021 2022 (f) 2023 (f)
Source: Knight Frank Research, MSCI
2022 O U T LO O K R E P O R T - 13 -Negative real interest rates will keep property
yields low in spite of higher nominal yields
Amid a surge in bond yields, it is only While in one sense this will put upward While higher nominal yields will push up
natural to consider the implications pressure on property yields, the impact of borrowing costs for leveraged buyers,
higher inflation on real interest rates also negative real yields will result in more equity
for property. Nominal yields
needs to be considered. Real interest rates capital being attracted to property as
have seen a rapid rise, reflecting have fallen precipitously – with headline CPI investors seek alternatives to holding cash
concerns over higher inflation and inflation currently at 3.0% and short-term and other fixed income investments with a
the potential for this to result in nominal rates close to zero, the current short negative real return.
central banks bringing forward the term real interest rate sits at around -3.0%.
Property assets that are able to quickly adjust
timing of rate rises. Property is a real asset class, and hence rental income to a higher inflation
the real bond yield is a better like-for-like environment will be well placed, and this
While this is unlikely to run much comparator to property yields than the explains part of the drive for specialist
nominal yield. In normal times – with inflation property assets such as build-to-rent,
further in the absence of a sustained
hovering around, or somewhat below, its childcare centres and healthcare.
pick-up in wage growth, it will clearly target level – the movement in nominal
impact swap rates and hence For office markets, the market is unlikely to
yields is an excellent proxy for movements
respond aggressively in either direction to
raise borrowing costs for property in the real yield, but at times like this,
what is still generally perceived to be a
investment. real and nominal yields are moving in
temporary spike in inflation. Following the
Ro t ating to re covery
opposite directions and both need to be
pattern of 2021, well-located office assets
carefully considered.
offering strong income are expected to see
modest yield compression, with potential for
faster capital growth in higher yielding
Rather than getting paid less than markets outside of Sydney and Melbourne
such as Canberra.
inflation, why not buy stuff – any stuff –
that will equal inflation or better? We see
a lot of investments that we expect to do
significantly better than inflation.
Ray Dalio, Bridgewater Associates
Prime office yield outlook
Percent (%)
10% Sydney Spread of average prime yield over real yield
Melbourne 10 year bond yield
Canberra Real interest rate
8%
6%
4%
2%
0%
-2%
-4%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 (f) 2023 (f)
Source: Knight Frank Research, Oxford Economics, Macrobond
- 14 - KNIGHT FRANK RESEARCH INSIGHTIndustrial yields will show convergence
across cities toward global norm of 3-4%
Structural change in the band of 3-4%. At this level, industrial yields With tight land supply and a positive occupier
occupier market has translated have edged below office yields in many market outlook across the board, pricing is
global markets including Australia and pricing more likely to reflect asset fundamentals and
in a fundamental re-rating of the
is increasingly in line with stabilised assets in lease length so pricing differences based on
industrial sector by investors and it operational real estate sectors such as historic perceptions of city‑specific factors
is increasingly viewed as essential healthcare and build-to rent, having will become less relevant.
community infrastructure, offering historically traded at a significant discount.
stable long-term and low-risk With global yields showing convergence, we Industrial yield trajectory in 2022
income and a growing demand base. expect this to be mirrored at a national level
with further convergence across the major
In addition, as our cities have grown, the
cities. After dramatic yield compression, Sydney down 25bps 3.5%
value, scarcity and growth potential of the
Sydney and Melbourne yields are now in
underlying land is becoming a more
important factor in establishing the value of
line with global pricing trends. Current Melbourne to hold 3.5%
market momentum indicates that further
specific assets as investors scramble to
bolster their holdings.
compression may occur, but there is Brisbane down 25bps 4.0%
arguably more potential for growth in
Reflecting these shifts, pricing has adjusted markets such as Perth and Adelaide
markedly, not only in Australia but globally. where yields remain well above those
Perth down 50bps 4.25%
Prime industrial yields in the major gateway on the Eastern seaboard.
markets now generally trade in a lower, tighter Adelaide down 50bps 4.25%
Source: Knight Frank Research
Global prime industrial yields
Percent (%)
9% London
Paris
Frankfurt
8% Hong Kong SAR
Sydney
Melbourne
7%
6%
5%
4%
3%
2%
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Source: Knight Frank Research
2022 O U T LO O K R E P O R T - 15 -Pent up demand will drive
office leasing market recovery
With persistent lockdowns and huge As a consequence, occupier demand has This recovery will take place notwithstanding
uncertainty during 2020 and 2021, been subdued and some corporates have an ongoing debate on workplace dynamics,
gone further and opted to shed excess as explored in the workplace chapter of this
many businesses bought time by
space, resulting in a contraction in net report. The corporate response will vary
deferring major decisions on their office demand. This has primarily impacted widely, and there is no evidence of widespread
office space, instead taking short Sydney and Melbourne, where vacancy downsizing. Furthermore, the fact that density
term lease extensions and in rates have risen sharply, but all markets ratios have tightened substantially over the
most cases opting to remain in have experienced this weaker sentiment past decade means that for most businesses
to some degree. there is limited excess space to cut.
their current space until they
have greater clarity on future. Looking ahead, with prospects for a robust However, these pressures will mean that
space needs. economic recovery and rising employment, absorption is unlikely to rebound quite as
the scene is set for the release of pent-up strongly as it has in previous recoveries in the
demand which will help boost absorption early 90s and post GFC period, and we
rates and drive market recovery in 2022. expect demand to instead rebound back to
levels of demand similar to that experienced
in 2015-18.
Office net absorption and economic growth
Ro t ating to re covery
LHS - sqm, RHS - Percent (%)
1,200,000 CBD (LHS) 7.5%
Non-CBD (LHS)
1,000,000 6.0%
GDP growth (RHS)
Total employment growth (RHS)
800,000 4.5%
600,000 3.0%
400,000 1.5%
200,000 0.0%
0 -1.5%
-200,000 -3.0%
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022(f)
Source: Knight Frank Research, PCA, Oxford Economics
Office net supply - major CBDs
sqm
600,000 Total
Melbourne
500,000
Sydney
400,000 Brisbane
Perth
300,000
Canberra
200,000 Adelaide
100,000
0
-100,000
-200,000
2018 2019 2020 2021 2022 (f) 2023 (f) 2024 (f) 2025 (f)
Source: Knight Frank Research, PCA
- 16 - KNIGHT FRANK RESEARCH INSIGHTStronger rental growth underpinned by
tightening vacancy over the next few years
CBD office vacancy rate
After rising sharply since the onset of the Percent (%)
pandemic, vacancy rates in most major
capital city markets are expected to 25% Sydney Perth
decline over the next few years reflecting Melbourne Adelaide
strengthening demand for office space
Brisbane Canberra
coming out of the pandemic. Vacancy rates
across the major capital city markets are 20%
expected to fall by between 1.9% to 5.2%
between 2022 and 2025, with Brisbane and
Perth recording the largest declines.
15%
10%
5%
0%
2015 2016 2017 2018 2019 2020 2021 2022 (f) 2023 (f) 2024 (f) 2025 (f)
Source: Knight Frank Research, PCA
Incentives will begin to fall in 2022
driving stronger effective rental growth
Following large falls in effective rents in 2020 Net effective rental growth
and smaller declines this year, average
incentives look to have peaked in most major
Average annual growth, Average annual growth,
capital city markets. Declining incentives will
2020-2021 2022-2025
fuel stronger effective rental growth over the
next few years. Perth, Sydney, Melbourne,
and Brisbane are all expected to see
significant increases in effective rents
Perth -8.4% 5.4%
between 2022 and 2025. Perth is expected
to see the strongest rise at 5.4% in average
annual terms over the period reflecting the
current elevated incentives, followed by
Sydney -10.5% 4.8%
Sydney with 4.8% and Melbourne at 4.0%.
Melbourne -8.2% 4.0%
Brisbane -7.6% 3.7%
Canberra 1.0% 3.3%
Adelaide 1.0% 2.0%
Source: Knight Frank Research
2022 O U T LO O K R E P O R T - 17 -Investment: Rotating to resilience By Ben Burston and Chris Naughtin Knight Frank Australia.
Resilience of property performance will drive
higher portfolio allocations to real estate
At the outset of the pandemic, uncertainty The pandemic adds weight to the argument
gripped the property markets across all that property has become less volatile over
sectors: would the ‘late cycle’ environment successive economic cycles. Peak returns
so often referred to in 2019 give way to a at the top of each successive cycle have
downturn bearing resemblance to the GFC? been lower, and the downturns have been
Would retrenchment in the labour market shallower. The dramatic highs and lows
erode consumer and business confidence of the late 1980s and early 1990s and the
and result in a protracted period of economic GFC period have given way to a more
under-performance and a slow-grind stable environment.
recovery akin to the early 1990s?
There are a number of reasons for this,
These were reasonable questions, but as most obviously the low interest rate
we noted at the time the circumstances of environment which has been supportive for
the pandemic were very different, and the property over the past decade and which
structure of the global capital market has provided an anchor for valuations during the
changed dramatically over the past decade. pandemic. This has attracted large flows of
equity capital to property seeking secure
Fears of a major downturn have proven to
long-term income returns no longer available
be misplaced and property has once again
in bond markets, and in turn this has given
demonstrated its resilience and critical role in
property a deeper and broader base of
providing stable income and ballast to multi-
investors less likely to retreat from the
asset portfolios.
nvestment
sector during economic downturns.
Across the Australian commercial market,
These long-standing forces are mutually
returns dipped into negative territory in Q1
reinforcing and have been exacerbated by
and Q2 2020, but the combined -2.6% fall
the pandemic. The gradual upward trend in
according to the MSCI All Property Index
property allocations – up from an estimated
stood in stark contrast to the wild ride
9% of global institutional portfolios in 2013 to
endured by equity markets, with steep falls in
11% in 2021 – looks set to continue in 2022
Q1 followed by a strong recovery.
and beyond and Australia is firmly in the
sights as a key target destination.
Quarterly return by asset class
quarter on quarter total investment return
20%
15%
10%
5%
0%
-5%
rends
-10%
AREITs
-15%
Australian equities
-20% Australian government bond index (7-10 yrs)
MSCI All Property Index
-25%
-30%
-35%
8
18
18
18
9
19
19
19
0
20
20
20
1
21
02
01
01
02
20
20
20
20
20
20
20
20
20
20
12
12
12
12
2
2
3
4
2
3
4
Q
Q
2
3
4
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Source: Knight Frank Research, MSCI
2022 O U T LO O K R E P O R T - 19 -Shift into specialist sectors and
long income assets will continue
While the low/risk return profile The rotation into alternative and specialist In Australia, the shift in asset allocation is
of property makes it an attractive sectors has been partly motivated by a desire particularly evident among domestic REITs.
for greater diversification among investors, Over the year to Q3 2021, office assets
sector to allocate capital, investors
particularly as occupier market conditions accounted for 36% of REITs’ total
are continuing to shift their become more uncertain in some sectors. commercial property acquisitions compared
investment allocations within the Investment in office assets in particular to 70% of REITs’ total disposals. By contrast,
sector. Investment in alternatives remains well down on pre-pandemic levels industrial assets accounted for 29% of
assets such as data centres, globally, in part reflecting uncertainty around acquisitions but just 12% of disposals, while
the strength occupier demand as companies retail assets made up 26% of acquisitions
medical facilities, build-to-rent,
navigate the return to the office and more and 18% of disposals. REITs were also
seniors housing, and student flexible working arrangements. While office significant net acquirers of alternative assets
accommodation, has accelerated assets remain attractive investments for despite the relatively small size of the market
markedly since the onset of the many, investors have placed a higher in some segments, such as build-to-rent, and
pandemic. Globally, investment premium longer and more stable income limited investment opportunities.
streams. The strong demand for long and
in alternatives assets has totalled
reliable income assets is particularly evident
US$288.1 billion in 2021 to date, in higher investment in the alternatives
accounting for 35% of global sector as well as for industrial and logistics
Rotating to resilience
investment volume, up three assets. We expect the desire for income
percentage points from 2020, and stability to continue to drive the rotation
into alternatives assets.
nine percentage compared to the
average over the five years to 2019.
Global commercial property investment volume Domestic REIT acquisitions by sector
US$ billion (LHS), Percent (%) (RHS) Share of total, year to Q3 2021
Alternatives as a share of total (%, RHS)
$1,200
Industrial (%, RHS)
40% 9%
Office
Industrial Office
35%
$1,000
Retail
26%
Industrial
36%
Hotel Retail
Alternatives 30% Alternatives
$800
25% 29%
Domestic REIT disposals by sector
$600 20% Share of total, year to Q3 2021
15% 18%
$400
10% Office
12% Industrial
$200 Retail
5%
70%
$0 0%
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Source: Knight Frank Research, RCA
(YTD) Source: Knight Frank Research, RCA
- 20 - KNIGHT FRANK RESEARCH INSIGHTBuild-to-rent pipeline will continue to expand as funds
seek diversification and build‑to-core strategies
After a lengthy wait, an Australian Secondly, the pipeline of traditional apartment values than in Sydney leading a wide range of
Build-to-Rent (BTR) sector is finally development has slowed substantially from investors to form development plans and
the highs of recent years, which could lead to new capital partnerships.
emerging. Multiple large-scale
under-supply when borders reopen and
developments are now under way international migration resumes. Apartment
Numerous challenges remain, with tax and
and plans continue to take shape planning frameworks still grappling with how
approvals have dropped substantially across
and to what extent they should adapt to
for a sustained pipeline of activity the Eastern seaboard from the peak levels of
accommodate the growth of BTR, and even
across the country, with Melbourne 2015-17, thereby creating greater opportunity
with growing momentum it will take many
for BTR to help fill the void.
emerging as the focal point for years for the sector to mature. But the current
new development. Lastly, land tax discounts in NSW and Victoria momentum is undeniable and BTR looks set
have been enacted to help spur the growth of to emerge as an important part of the new
While the demand side drivers have been the sector, which state governments view as supply picture in years to come.
supportive for some time, numerous barriers having an important role to play in providing
have stood in the path of BTR. However, more housing options as well as boosting the
shifting dynamics as a result of the pandemic pipeline of new construction on a sustained
have combined to make BTR more attractive basis going forward.
and triggered widespread investor interest.
The combined impact has been to prompt a
Firstly, the pandemic has prompted wave of new schemes as developers react to
property investors to seek greater the changed environment and in some cases
diversification. The traditional dominance pivot away from plans for hotel or
of office and retail assets is waning, with conventional build-to-sell developments.
investors seeking increased exposure to Melbourne is now emerging as the epicentre
industrial and specialist sectors linked to of activity, with robust demand and lower site
demographic trends.
Allocating into acceleration
E-commerce Industrial (logistics)
Build-to-rent
More renters
Self storage
Aging population Retirement living
Life sciences
Health spend
Medical centres
Cloud computing Data centres
Female workforce
participation
Childcare centres
Domestic tourism Pubs
Carbon neutral buildings
ESG focus
Renewables infrastructure
Source: Knight Frank Research
2022 O U T LO O K R E P O R T - 21 -Offshore While domestic investor activity
has picked up noticeably in
A key reason underpinning sustained
offshore investment activity is that offshore
investors will
investors generally have lower target returns.
recent months, offshore investors
Most advanced economies adopted near-
continue to play a key role in driving zero interest rate policies more quickly
continue to play commercial property investment in
Australia. Offshore investors have
than Australia and so major global funds
have a had longer to adjust to lower returns
an active role accounted for an above-average compared to domestic investors.
43% of commercial property Another factor supporting offshore
in investment investment volume in 2021 to date, investment is the significant narrowing of the
and 68% of investment for deals interest rate differential between Australia
markets as assets greater than $250 million.
and major advanced economies over the
past few years as the RBA further eased
shift to buyers Singaporean and Hong Kong investors
have been the main drivers of offshore
monetary policy. The interest rate differential
is one of the main factors determining
with lower investment activity, particularly the acquisition
of Milestone logistics portfolio by GIC and
currency hedging costs, and the lower
interest rate differential has reduced hedging
target returns ESR from Blackstone. While there is perennial
interest in Australian property assets from
costs for offshore investors looking to deploy
capital in Australia.
Singapore and Hong Kong, investment
For these reasons we expect offshore
activity has also picked up among European
investors will continue to play a highly active
investors, particularly from the UK and
role in Australian commercial property
Germany. By contrast, US investors have
markets. Along with sustained investment
Rotating to resilience
been net sellers although this mainly reflects
from countries like Singapore and Hong
the Milestone deal. Australian investors have
Kong, the recent increase in activity among
been marginal net sellers, with a sizable net
European investors is adding an additional
disposal of office assets mostly offset by net
source of capital to the market that will
acquisitions of industrial and retail assets.
bolster market depth and liquidity.
Net acquisitions of Australian assets by country
Year to Q3 2021, $bn
$4 All sectors
Office
$3 Industrial
Retail
Alternatives
$2
$1
$ billion
$0
-$1
-$2
-$3
-$4
-$5
-$6
)
e
y
a
om
a
ia
a
n
er
es
AR
an
re
in
d
or
pa
l
th
ra
at
na
Ch
Ko
ap
d
(S
m
Ja
O
st
St
ng
Ca
er
ng
ng
Au
d
h
d
Ki
G
an
ut
te
Si
Ko
So
d
nl
ni
te
g
ai
U
on
ni
M
U
H
Source: Knight Frank Research, RCA
- 22 - KNIGHT FRANK RESEARCH INSIGHTThe green premium will become more evident as
investors adopt net zero portfolio targets
The increasing importance of ESG Importantly, the analysis allows for the fact Going forward, the importance of energy
considerations within real estate that several other factors influence price – efficiency and its impact on building values
such as location, building height and grade can only be expected to increase as more
has been widely publicised, but
– so is an estimate of the specific impact of and more tenants and investors adopt
it is less well understood that the NABERS rating after taking these other specific environmental targets for their own
sustainability credentials are considerations into account. real estate activities. Under-performing
already having a significant assets will come under greater pressure
Modelling on London offices also suggests
impact on building values. from a reduced pool of potential tenants
a significant price premium based on
and buyers and this is likely to increase the
As presented in the 2021 Active Capital sustainability credentials, so the analysis
differential in values between high and low
Report, Knight Frank have used hedonic price depicts a global trend consistent with the rise
performing assets in years to come.
modelling to identify the contribution to sales of ESG. Tenants are increasingly gravitating
price attributable to building’s green rating. toward stock that offers a high degree of
The results found that Sydney and Melbourne energy efficiency and this is impacting rental
office buildings with a NABERS Energy performance and allowances for downtime
rating of up to 4.5 stars benefit from an 8% in buildings with vacant space. At the same,
premium on sales price compared to unrated investors are taking a forward-looking
buildings, while those with very high ratings of approach when assessing building value and
5, 5.5 or 6 stars enjoy an 18% premium. view strong sustainability credentials as key
to minimising risk.
NABERS energy rating impact on capital value
$/sqm
$35,000
$30,000
$25,000
$20,000
$15,000
$10,000
Linear trendline
$5,000
$0
0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 6
NABERS energy rating
Source: Knight Frank Research
2022 O U T LO O K R E P O R T - 23 -Domestic institutions rotating out of older office
assets and into development in emerging precincts
Rotating to resilience
Artists Impression: Quay Quarter Tower, Sydney.
While a strong recovery in demand As a consequence, the market will see Reflecting these forces, 2022 is likely to see
is likely during 2022, the office continued change to the form, function, domestic institutions trading out of older
quality and quantity of space demanded. This stabilised assets and focussing instead
market will still see a period of
will naturally favour premium and A grade on new developments. With yields close to
adjustment in response to demand- stock, and tenants can be expected to take historic lows in most markets, build-to-core
side changes wrought by the advantage of the greater range of choice and strategies offer the opportunity to achieve
pandemic. Real estate will retain its more favourable terms on offer by trading up higher returns while mitigating against these
strategic importance for business, to higher graded assets. risks by prioritising the higher-grade stock
that tenants will gravitate towards.
but the need to provide a compelling The presents risks to the performance of
workplace experience has become secondary assets – or worse, of accelerated Over time this will help to drive the transition
more pressing, resulting in a obsolescence – and they are likely to lag the in the office market, providing a welcome
market recovery. Furthermore, older assets boost to the economic recovery and
heightened focus on the quality and
with lower NABERS ratings may be vulnerable shaping new precincts off the back of
breadth of amenity provision, as as institutions adopt stringent ESG criteria infrastructure changes and expansion
discussed in the Workplace section and seek to offload non-compliant assets. into the emerging fringes.
of this report.
- 24 - KNIGHT FRANK RESEARCH INSIGHTNew Super benchmarks may deter
funds from large-scale development
The Federal Government’s Your The reforms require APRA to conduct For real estate, the reforms will potentially
Future, Your Super reforms came an annual performance test for MySuper deter some funds from deploying capital
products, to assess the investment into large scale development projects,
into effect on 1 July 2021 and are
performance of each product over an eight- since these expose them to specific project
intended to improve the efficiency, year time horizon. If a fund fails the test it will risks that could negatively impact their
transparency and accountability of be required to report this to its unitholders performance relative to the benchmarks.
the superannuation system. and persistently underperforming products Funds such as CBUS have noted that a push
will be prevented from taking on new to passive investing could make it more
members. difficult for them ‘to be active and direct
providers of capital into the economy’.
One aspect of the debate around the
reforms concerns the extent to which they Super funds have been vital sources of
will encourage ‘index hugging’ and passive capital for the property industry and have
investment strategies, as funds guard taken a key role in development, but the
against the risk of more active strategies reforms may lead them to adopt a more
leading to underperformance relative to passive approach to real estate investment.
performance benchmarks.
2022 O U T LO O K R E P O R T - 25 -Industrial: Responding to supply chain disruption By Katy Dean Knight Frank Australia.
Industrial
Focus on supply chain resilience
will continue to drive demand
While growth in e-commerce Manufacturing has been the hardest hit
continues to be the stalwart behind of the sectors, with 55% of respondents
reporting supply chain disruptions. Retail and
the demand for industrial and
wholesale trade sectors were at 52% and
logistics real estate, the pandemic 50% respectively and logistics businesses
has exposed widespread supply at 21%. Of the firms that reported disruption,
chain vulnerability. These pressures the problems are most acute for the
will drive demand and also influence logistics sector, particularly the availability
of sea freight services, with 73% of those
the supply side in 2022 and beyond.
logistics businesses experiencing disruption
According to a special survey by the ABS ‘to a great extent’, followed by 60% of
before the recent lockdowns, three in wholesalers.
10 Australian businesses said they were
Globally, commodity and energy prices are on
having trouble getting parts or products
the rise, while shipping line constraints and
they need. Of the 30% that reported supply
port congestion due to the pandemic have
chain disruptions, more than a third (37%)
seen transportation costs spiral upward since
were affected to a great extent, suffering
mid-2020. This is putting huge pressure on
major delays or were unable to get certain
retailers and manufacturers that urgently
items, with the respondents saying this was
require container space for imports at a time
significantly impacting revenue.
when demand is very high from consumers
set to unleash a further spending spree as
lockdowns end.
2022 O U T LO O K R E P O R T - 27 -Reports of Supply Chain Disruption
By industrial related industry, share of survey (%), April 2021
Manufacturing
Other Services*
Retail Trade
Wholesale Trade
Mining
Construction
Utilities
Responding to supply chain disruption
Logistics
0% 10% 20% 30% 40% 50% 60%
Source: Knight Frank Research, ABS *includes repairs and maintencance
Extent of Supply Chain Disruption
By industrial related industry, share of survey (%), April 2021 Not at all A small extent A great extent Don’t know
Manufacturing
Other Services*
Retail Trade
Wholesale Trade
Mining
Construction
Utilities
Logistics
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Source: Knight Frank Research, ABS *includes repairs and maintencance
Many companies wish to expand their
warehouse facilities to manage this surge
capacity and there has been a scramble for
space. As a result, leasing take-up volumes
are currently running 31% above their
long-run averages on the east coast, while
pre-leasing activity for new buildings grew
by 11% in the 12 months to October 2021.
Demand for modern stock is well and truly
outpacing supply and will see the market
remain tight during 2022. This will have an
impact on take-up levels in 2022, which are
forecast to be slightly below the peak levels
of 2021, with the lack of stock putting some
pressure on deal flow until 2023 when some
of the pressures should have eased.
- 28 - KNIGHT FRANK RESEARCH INSIGHTEastern Seaboard Industrial Take-Up
By City, ‘000 sqm, (>5,000sqm)*
4,000
Sydney
3,500 Brisbane
Melbourne
3,000
2,500
2,000
1,500
1,000
500
0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021(f) 2022(f) 2023(f)
Source: Knight Frank Research *Take-up of vacant space, includes pre-commitments
Pressures also impacting
the supply side
Meanwhile, cost pressures are also US Midwest domestic hot-rolled coil steel futures price
impacting the supply side of the equation. US$/metric ton
Steel has seen dramatic price increases
since the end of 2020. The benchmark price 2,000
for hot-rolled steel hit another record high
recently, climbing to US$1,900 per ton. This 1,800
is up from the US$580 that it traded at in
February 2020, representing a staggering
1,600
228% increase. This price growth trajectory,
alongside increases in cost for other building
materials including timber, metals and 1,400
electrical goods, is escalating industrial
building construction costs and causing 1,200
project delays. These forces will add upward
pressure on rents in the near term as owners
look to absorb these inflationary pressures. 1,000
800
600
400
200
0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Source: Knight Frank Research, Investing.com US futures price monthly price
2022 O U T LO O K R E P O R T - 29 -How is supply chain
disruption impacting
business decisions?
Suzanna Murray,
Director, Occupier Services
Knight Frank Australia.
1 Panic
2 Just-in-time
The past 18 months have
been transformational in
the way we as a society view buying storage
the supply chain. A decade
ago, conversations about the Retailers stock their shelves on an Previously retailers and industrial clients
Responding to supply chain disruption
movement of goods rarely assumption of what is purchased on an purchased and held goods at storage
average basis at each stage of the year. levels that only allowed them to manage
breached the walls of a board
This assumption plays critically into the through each cycle. The knowledge that
meeting or into the day-to-day just-in-time storage model. Australians goods could be imported on a reliable basis
conversation of the public. The have been named as among the worst meant that few people stopped to think
influences of COVID-19 have culprits of Panic Buying since the pandemic “What if the supply chain isn’t reliable?”
brought to light the importance began with over 17% of us taking part, However, pandemic-induced disruption to
according to a survey by Deakin University, manufacturing and distribution, particularly
of understanding how global
QUT and the University of Melbourne. out of China, was the tipping point for
supply chain works and how it Further compounding the unreliability of the widespread delay in goods reaching our
influences each of us on a daily just-in-time storage model, requirements of shores. Compounded by the effects of port
basis. Here are the top five ways industrial tenants have grown to be able to side union disputes and further consolidation
that supply chain has impacted store goods required by the public. of the shipping lines, this has pushed the
reliability and turnaround time for the supply
us, and how it’s impacting the
chain. In response, we are now seeing
property choices that occupiers retailers and warehouse tenants move to
are making: storage models that will allow goods to be
held for multiple retail cycles, providing more
certainty for businesses and consumers.
- 30 - KNIGHT FRANK RESEARCH INSIGHTYou can also read
