The retail renaissance continues
Retail has emerged as the standout performer, delivering a robust 5.73 per cent total return for the quarter, ranking first among all major asset classes. This performance is driven by strong income returns of 5.98 per cent and minimal capital decline of just -0.24 per cent. More impressively, sub-regional retail centres are leading the charge with an exceptional 8.34 per cent total return, followed by regional centres at 6.74 per cent. This retail revival reflects the sector's successful adaptation to changing consumer behaviours, limited new supply, and strong population growth driving improved occupancy rates.
The retail sector's three-year annualised performance of 4.12 per cent demonstrates sustained strength, validating our prediction that retail would transition from the previous era dominated by "beds and sheds" to become the new "bricks and clicks" leader. Metropolitan assets continue to outperform regional locations, while the integration of experiential retail and essential services has proven particularly successful in driving foot traffic and rental performance.
Industrial sustains performance
Industrial property continues to demonstrate its defensive characteristics with a solid 4.83 per cent total return, making it the second-best performing major asset class. Importantly, industrial is the only sector showing positive capital growth at 0.40 per cent, suggesting underlying asset value stability. The sector's impressive three-year annualised return of 5.27 per cent reflects its sustained appeal to investors despite moderating from pandemic-era highs.
However, the data suggests a more complex picture within industrial. While headline performance remains strong, growing incentives and stabilising rents signal some cooling in traditional warehousing, even as specialised assets like data centres and cold storage continue to attract premium investment. Results can vary depending on location also, with the ongoing difficulty in land availability and cost of construction likely to set new benchmarks in value going forward.
Office market adjustment continues
The office sector remains the clear underperformer, with both CBD and non-CBD assets recording -4.11 per cent total returns. Despite maintaining reasonable income returns of 5.16 per cent for CBD and 5.64 per cent for non-CBD properties, severe capital value declines of -8.86 per cent and -9.27 per cent respectively highlight the structural challenges facing this asset class.
The persistent negative three-year total return performance (-2.95 per cent for CBD, -3.02 per cent for non-CBD) underscores the prolonged nature of the office market adjustment. This reflects ongoing high vacancy rates, ranging as high as 18 per cent in Melbourne CBD, and the continued impact of hybrid working arrangements on space requirements.
Market indicators signal potential recovery
Current capitalisation rates across the sector have expanded to levels not seen in recent years, with office yields estimated at 7.00 to 8.00 per cent, retail at 6.00 to 6.50 per cent, and industrial at 5.50 to 6.00 per cent. These higher cap rates create attractive entry points for investors, particularly when compared to the low yields on offer during 2021 and 2022.
The all property market 1.01 per cent total return represents a crucial turning point. After an extended period of negative returns, this modest positive performance suggests we may be approaching the bottom of the cycle. Income returns remain robust across all sectors at over 5 per cent, providing important cashflow support while capital values continue their adjustment.
Several factors position the market for potential recovery throughout 2025. Interest rate expectations remain favourable, with anticipated reductions likely to support asset valuations and improve debt serviceability. The substantial gap between current cap rates and government bond yields creates an attractive risk premium that should draw renewed investment activity.
Foreign investment interest is strengthening, particularly in retail and select office opportunities, while private investors continue to dominate the sub-$20 million market. The retail sector's momentum appears sustainable, supported by limited new supply and continued population growth. However, challenges remain. Office markets face ongoing structural adjustment, and while industrial maintains its appeal, traditional warehousing may experience some moderation. The key will be identifying quality assets with strong fundamentals and clear value-add potential.
The data suggests Australian commercial property is transitioning from correction to cautious recovery, with retail leading the charge and industrial providing stability, while office markets continue their structural reset toward a new equilibrium.
