The retail sector continues its leadership position, delivering total returns of 9.2 per cent driven by capital growth of 3.0 per cent alongside income returns of 6.0 per cent. This performance contrasts sharply with late 2023 when most retail categories remained in negative territory. Sub-regional centres lead the sector at 10.9 per cent total returns with capital growth of 3.9 per cent, while regional centres recorded 10.5 per cent returns. Even super regional and major regional centres achieved 8.5 per cent, suggesting larger format retail is stabilising after adjustment. Neighbourhood centres posted 8.5 per cent total returns with capital growth of 2.7 per cent, demonstrating the strength of convenience-focused retail. The consistency of performance across all retail subcategories indicates the sector's structural recovery is broad-based rather than concentrated in specific property types.
Industrial assets recorded total returns of 8.6 per cent, with capital growth strengthening to 4.1 per cent alongside income returns of 4.3 per cent. While this represents a moderation from the sector's exceptional 2020-2022 performance, the sustained positive capital movement confirms industrial's structural advantages remain intact. Distribution facilities and warehouse assets both delivered returns above 8.4 per cent, maintaining the sector's reputation for balanced total return strategies.
Geographic variations within industrial reveal where the strongest capital growth is occurring. Queensland industrial led with total returns of 10.8 per cent and capital growth of 5.7 per cent, driven by population influx and expanding logistics requirements. New South Wales industrial recorded total returns of 9.7 per cent with capital growth of 5.6 per cent. Western Australia industrial posted exceptional returns of 10.0 per cent with capital growth of 4.2 per cent, reflecting resource sector strength and supply constraints that continue to attract east coast investors seeking compelling risk-adjusted returns.
Office markets remain under pressure from structural challenges, though notable regional variations reveal how fundamentals are driving dramatically different outcomes. Total returns reached 5.9 per cent, supported by steady income returns of 5.5 per cent, but capital growth remained subdued at just 0.4 per cent nationally. Brisbane CBD office delivered the strongest performance with total returns of 10.6 per cent, driven by capital growth of 4.4 per cent. The combination of vacancy below 11 per cent, pre-committed Olympic infrastructure activity, and limited new supply continues to support valuations in the Queensland capital. Sydney CBD recorded respectable total returns of 7.7 per cent with capital growth returning to positive territory at 2.4 per cent, suggesting premium assets in supply-constrained markets are finding value support.
Melbourne CBD office remains the notable underperformer with total returns of just 3.8 per cent and capital growth declining by 1.6 per cent. The combination of elevated vacancy rates of 19 per cent, significant new supply in the pipeline, and persistent hybrid work adoption continues to pressure valuations. Melbourne represents the clearest example of how vacancy and oversupply dynamics directly impact capital values. Perth CBD continues its steady recovery with total returns of 2.9 per cent, though capital values declined 2.3 per cent. The city's construction activity is likely to now stall and gradual improvement in leasing fundamentals position it well for future capital appreciation as the cycle matures.
Western Australia's performance across asset classes reveals the impact of relative affordability and economic confidence on commercial property. WA retail delivered total returns of 10.2 per cent with capital growth of 3.2 per cent, matching NSW's performance despite lower absolute pricing. This reflects growing investor recognition that WA markets offer compelling risk-adjusted returns. The state's combination of resource sector strength, controlled supply pipelines, and improving population growth creates conditions that support both rental and capital appreciation.
Premium CBD office has narrowed capital decline to just 0.4 per cent with total returns of 6.0 per cent, suggesting these assets are approaching value stabilisation. Premium Sydney CBD office achieved 8.8 per cent total returns with capital growth of 3.7 per cent, while Premium Brisbane CBD office posted 10.6 per cent returns with 4.4 per cent capital growth. Grade A CBD office recorded 5.9 per cent total returns with capital growth of just 0.3 per cent, indicating the quality gap matters significantly in current market conditions.
The return to positive capital growth validates strategic positioning many investors adopted during the downturn. Those who acquired quality assets at expanded cap rates are now seeing both strong income yields and emerging capital growth, delivering the total return equation that makes commercial property compelling. However, capital growth isn't returning uniformly across all assets. The data clearly demonstrates quality and positioning matter more than ever, with premium assets in strong sectors achieving meaningful capital appreciation while secondary assets in challenged sectors continue facing value pressure.
The December 2025 data represents more than incremental improvement, it marks the transition from yield adjustment to capital growth. However, upward inflationary pressures on interest rates seen in 2026 may put a dampener on urgency in the marketplace. Despite this, capitalisation rates are likely to remain in their holding pattern, suggesting the return of capital growth reflects genuine improvement in asset fundamentals rather than yield compression alone. For investors seeking to position portfolios for the next growth phase, understanding which specific markets and property types are leading capital growth will be critical to generating superior returns.
