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2024 Knight Frank Horizon Report Summary

Introduction

The Horizon Report provides insights on Australian real estate, focusing on macroeconomic trends, investment performance, and sector-specific outlooks for 2025 and beyond. It outlines a journey through key challenges and opportunities, emphasizing resilience and renewal in the property market.

Top 7 Insights for 2025

• A New Cycle Dawns
  Australian real estate is poised for cyclical recovery, with core assets repriced and pricing at a cyclical low. Core assets in Sydney are expected to lead the recovery, followed by industrial sectors, generating strong returns.
• Ready to Strike
  Investors are preparing to execute revised strategies after a period of caution, driven by policy easing and enhanced liquidity. Their appetite for higher-risk opportunities increases as the market thaws.
• Addressing the Mid-Market
  Policy changes, such as MIT reforms and tax incentives for Build-to-Rent (BTR), require tailored approaches to accelerate development. Success in mid-market rentals is key to broad support for BTR policies.
• Higher Supply Divergence in Industrial Rent
  Rising supply in 2025 will create disparities in rent performance, with markets like Sydney’s Outer West seeing stronger gains, while others face prolonged vacancy and subdued growth.
• Retail Resurgence
  Retail demand is rebounding strongly, with investor interest reaching levels not seen since 2015. Factors include improving consumer incomes, population growth, and resilience in leasing metrics.
• Economic Acceleration
  Growth in real incomes and easing tensions with inflation and interest rates support a brighter economic outlook for 2025, underpinning consumer spending and investor confidence.
• Neutral Interest Rate Search (R)*
  The long-term outlook is shaped by the debate on R*, with implications for asset valuations. Uncertainty about the level of interest rates influences investment strategies and recovery strength.

Economic Outlook

The economy is expected to accelerate in 2025, boosted by rising real incomes, declining inflation, and government stimulus. Real disposable income growth has stabilized at 1.5%, with interest rate cuts anticipated by the RBA in the first half of 2025, leading to improved consumer spending and economic activity.

Office Sector Highlights

French angle: Greater focus on CBD dominance, with metro corridors reinforcing city centrality. Secondary offices face risk repricing due to variability in asset quality and demand, leading to widened yield spreads. Workplace flexibility and ESG factors drive demand for high-quality, sustainable spaces, with companies prioritizing financial prudence.

Industrial Sector Highlights

Industrial rent divergence in 2025 is fueled by supply growth outpacing demand in some areas. Hardstand storage investments are rising due to higher yields, repurposing industrial portfolios. Divergence in precinct performance and vacancy rates highlights opportunities in constrained locations like Sydney’s South and Melbourne’s West.

Retail Sector Highlights

Retail investment has surged, ranking among the top sectors with volumes comparable to 2015 levels. Improved leasing spreads and MAT resilience demonstrate sector strength, supported by stable demand and population growth. E-commerce penetration is gradually increasing, but not yet a major threat to performance.

Alternatives Highlights

The BTR sector is expanding, aiming to bridge ambition and action with core capital influx. Challenges include affordability hurdles and policy reforms; healthcare REITs are resuming buyer interest after divestments. Data centers benefit from AI demand, with Melbourne emerging as a hub, offering opportunities for land and power assets.

Conclusion

The Australian property market enters a cyclical recovery phase in 2025, driven by economic optimism, policy shifts, and sector-specific tailwinds. Opportunities lie in core assets, emerging living sectors, and data-intensive investments, though challenges like supply imbalances and regulatory debates persist.