News & Insights

The Great Commercial Real Estate Reset: A Once-in-a-Decade Opportunity Driving La Trobe Financial’s Next Investment Strategy

The Australian commercial real estate market is immense. With c.$1.35 trillion in investable commercial real estate assets*, it is an asset class long favoured among institutional investors, forming a core part of portfolio allocations.

This very mature asset class is undergoing a reset. And it might just be the next big investment opportunity.

The Great Reset

The global pandemic permanently changed the way Australians live and work.

Companies are now prioritising quality real estate to reinvigorate the office experience and entice staff to return to the workplace. Retail centres are being repositioned as social hubs and destination locations to entice shoppers away from online shopping. Industrial property is being prioritised as businesses look to onshore manufacturing and embrace the growth in e-commerce.

These trends are providing a tremendous pipeline of high-quality investment opportunities within the Australian middle-market, and La Trobe Financial is uniquely positioned to take advantage of these opportunities for investors.

History often rhymes

The commercial real estate market has gone through a period of ‘resetting’ before. And history tells us that when these moments in market happen, it can be the catalyst for a strong and persistent investment opportunity.

Looking back over the past 40 years in Australian commercial real estate shows clear moments of opportunity. Distinct moments of key entry points, corrections, and recovery phases.

The first transformative period occurred in the early 90s. During the ‘recession we had to have’ capital returns declined 34% from 1990 to 1993, with the trough in capital values reached in December 1993. What happened next was a return to positive capital growth with a “U-shaped” recovery. The patient investor with dry powder waiting was handsomely rewarded with an unprecedented 15-year growth cycle that ended in December 2007, but delivering a cumulative capital gain of 78% (390% or 12% per annum in total returns, unlevered). Just reward for investors who identified the investment opportunity and backed the strong fundamentals underpinning the sector, and the cyclical nature of commercial property.

The second pivotal opportunity emerged immediately following the Global Financial Crisis. There was, on average, a 15% capital reduction across all property segments during this period. This was followed by a “V-shaped” recovery, before a period of steady capital growth for investors across 13 years, peaking in September 2022 with the onset of the current interest rate tightening cycle, delivering a cumulative capital gain of almost 50% (219% or 9.5% per annum in total returns, unlevered).

Is History Repeating Itself?

We are witnessing the third major reset in the Australian commercial real estate market. And the structural changes to the commercial real estate market are being compounded by the interest rate environment we have lived through over the last 5 years.

Following the rapid rise in interest rates, we are seeing a significant mismatch between the pricing expectations between sellers and buyers. For property owners who acquired leveraged-assets during the ultra-low interest rate environment of 2020-21, they are now facing debt refinancing at substantially higher rates, in some cases seeing their cost of debt double or triple.

This shift in the cost of capital has forced many owners to reassess their positions, particularly those with upcoming debt maturities or floating rate exposures. Even for those who can carry the debt, they are finding it more difficult to obtain credit following traditional lenders withdrawing from parts of the commercial real estate market. And La Trobe Financial has had a front-row seat to this emerging opportunity via our long-standing commercial credit investment strategies.

This is creating a wonderful, generational opportunity. The market has commenced a prolonged period of price adjustment followed by what we believe will be a gradual return to positive capital growth. This is creating outstanding opportunities for strategic, long-term investors.

Australian Middle Market: A Wall of Opportunities

The pressures on commercial property owners are particularly evident in Australia’s middle market sector. This segment of the market encompasses properties ranging in value between $25-$150 million.  Not only are these assets subject to the same pressures as the wider market, but they are more likely to be owned by unlisted funds and syndicates facing redemption pressures, forcing them to sell assets into a market with fewer active buyers. This is the sort of favourable demand / supply dynamic that can drive superior portfolio performance.

The perfect storm of refinancing pressures, reduced debt availability and fund redemption requirements has created a growing pool of motivated sellers. However, the buyer pool remains thin as almost all are facing the same issues. This imbalance has created an opportunity to acquire quality assets at attractive prices and well below replacement costs.

An Enduring Strategy and a Once-in-a-Decade Opportunity

The current reset in the Australian real estate market presents a rare opportunity to participate in the next major growth cycle for commercial property.

Against this backdrop, La Trobe Financial is developing its Australian Real Estate Fund. With a clean balance sheet and no legacy assets, the strategy is positioned to capitalise on current market dislocation: making institutional-grade real estate accessible to everyday Australian investors.

As Australia’s Premier Alternative Asset Manager, La Trobe Financial manages over $20 billion in Assets Under Management on behalf of 110,000 investors^, and we are committed to keeping potential investors informed as the opportunity develops. Over the coming months, we will provide insights and updates as we work towards the launch of our La Trobe Australian Real Estate Fund. An enduring strategy thoughtfully designed for investors, launching at the commencement of a once-in-a-decade market cycle.

If you would like to learn more or would like to register your interest in one of our upcoming Australian Real Estate information sessions, please contact our friendly Asset Management team on (03) 8610 2775 or 0401 962 895 or by email at [email protected].