Australia’s commercial property market is seeing a positive turn, with S&P Global Ratings reporting that office landlords are set to begin recovering after years of market uncertainty. The agency’s latest analysis indicates stabilising office valuations across Australian capital cities, potentially unlocking new funding opportunities for Australian Real Estate Investment Trusts (A-REITs).
According to the report, the decline in office property values has begun to level off, with transaction activity increasing substantially since mid-2024. Rated entities have generated $2 billion in sales since June last year, with another $1.4 billion under heads of agreement or actively being marketed.
“The stabilisation of commercial property valuations is likely to improve funding conditions and capital flows,” the report stated, noting this should lead to lower bond spreads and improved access to longer-term funding options.
S&P analysts Ambrose Beaney and Aldrin Ang pointed out that current market conditions favour purchasing existing assets rather than new development, as inflationary pressures and supply chain constraints have dramatically increased construction costs.
“New developments are struggling to achieve economic rents, with many failing to proceed beyond feasibility studies,” the report said, adding that limited new supply should support transaction liquidity for prime-grade assets in central business districts.
The office sector has experienced significant challenges since the pandemic, with A-REITs facing restricted access to debt capital markets and increasingly relying on bank funding. This shift has reduced average debt maturity periods and increased lender concentration risks for many property trusts.
CBD vacancy rates remain a concern, particularly in Melbourne where vacancy sits at 18%, compared to Sydney at 12.8% and Brisbane at 10.2%. However, the Reserve Bank of Australia’s February rate cut to 4.1% appears to have helped stabilise valuations.
A notable trend identified in the report is major players like GPT Group and Dexus expanding their funds management businesses, potentially reducing their dependence on rental income. S&P cautions this evolution presents new risks, as earnings not derived from property rental income are “less predictable and inherently more volatile.”
Another risk factor highlighted is investor withdrawals from private wholesale funds. The report specifically mentioned that Mirvac Wholesale Office Fund has already faced redemption pressures, while GPT Wholesale Office Fund and Investa Commercial Property Fund could face similar challenges when their liquidity windows open in 2026 and 2027, respectively.
Despite these concerns, S&P’s outlook suggests the return-to-office trend and stabilising asset values have relieved pressure on most rated office-exposed issuers, with expectations they will “restore funding diversity and tenors over the next 12-24 months.”
What are your thoughts on the recent rebound seen in the commercial property sector? Share your insights below.
