Well, a lot can happen in 6 months … understatement.
Our January missive foreshadowed 2026 as a year that we’d “have to work for it.” At this time the market had not long flipped from expecting the RBA to cut rates (call this October 2025) to expecting rises. We talked on two rises, then saw three.
We expected rate movements would put upward pressure on commercial asset yields … and they have.
We expected inflation to continue to present risk in delivery cost for developments … and they have, plus some.
We again touched on avoiding the “Credit Crowd,” given we have said for some time the asset class has too much capital relative to quality opportunities. We are now certainly seeing the consequences of this through reporting of numerous high-profile and high-dollar-amount defaults.
We did not expect the US to invade Iran.
We did not expect tax reform on the scale the Labor government has now legislated.
This is proving a long down cycle for commercial real estate, if we call the start as the RBA first hiking rates post-COVID in May 2022.
So what new risks are we seeing, and what do we have to continue to manage? And where do we see opportunity?
The Capital Stack Matters
Being conscious of managing debt effectively always matters; what drives return can also bite. In particular, underwriting needs to assume rates may continue to rise, to then have moderated leverage on investment assets that can sustain increased finance costs.
Pre-development finance needs to allow time, or equity should be provisioned to cover delay in commencement … getting all the parts set to get started on a development requires effort and can very likely take more time in this environment.
Flight to quality
We have divested three commercial assets in the last six months: two with ease and to deliver strong investment returns, the third was – to be frank – a battle but we got there. What these sales evidenced, alongside what we are seeing in the broader market, is a flight to quality. There clearly remains deep pools of capital for the right assets – assets that have defensible income streams, quality of tenant covenant, and prospect for growth … capital is deep but discerning.
Let us provide metrics on one of these sales as exemplar, being our trade of SCIM 103) -Sunbury Lifestyle Centre on behalf of both Core Partners Fund 3 & 4:
Sunbury Lifestyle Centre
Investment amount: $7,790,000
Investment Type: Equity
Realised Gross IRR: 26.0%
Realised Gross Equity Multiple: 1.34x
Right housing product, at scale, in the right market matters
Our focus in residential development remains product for owner-occupier markets, non-luxury, and in markets with limited supply competition. We continue to see sales across all of our investments spanning apartments in Melbourne, land in Sydney, and a mix of apartments and semi-detached housing in South East Queensland.
Built form in NSW remains a challenging space, and one we would only enter aligned with an integrated builder/developer.
Further distress will present opportunity for those capitalised
As noted, the market isn’t suffering from a lack of capital … confidence is low and good news is scarce. We are seeing the effects of sustained stress in the market, and expect this will present opportunity. Having the origination capacity, not just capital alone, will matter.
