Revealed: The three hot property picks for 2025

In a virtual roundtable convened by The Australian Financial Review, the panel of four leading property bankers and corporate advisers from Morgan Stanley, Jarden, UBS and Denison Partners added private credit, also known as non-bank lending, to the already popular picks of large-scale residential rental developments and data centres, whose growth is fuelled by the surge in cloud computing and AI.

“A lot of people would say beds – the alternative ‘living’ sectors – sheds and data centres,” said Denison Partners partner Ian Holmes.

“Undoubtedly, capital will continue to flow to those areas, but there is a lot of capital chasing those opportunities already and, particularly with data centres, they require significant scale to compete with incumbents.

“Real estate private credit will continue to grow, and diversify from its overweight exposure to residential development. We also think that market will rationalise, and those groups with more robust credit processes, and an ability to work out challenging exposures, will become differentiated.”

The boom in private credit sector has expanded to about $200 billion, with much of that directed into residential projects, as the major banks, more wary of risk, reduce their exposure to commercial real estate. The surge has caught the attention of regulators, while some residential developers and projects have fallen over in the past year, putting pressure on their private lenders.

‘Key source’ of funds

Grant McCasker, head of Australia/NZ real estate at UBS, noted the “many private credit platforms changing hands”. Among them, last year Merricks Capital was bought by Phil King’s Regal Partners while Melbourne’s Payton Capital was scooped up by David Di Pilla’s HMC Capital.

Private wealth more broadly is becoming a “key source” for investment funds, according to Mr McCasker.

“We see this source of capital as a material growth driver for funds management business, and we suspect various groups [will] look to capitalise on this in 2025 to set up for long-term growth,” he said.

Meanwhile, the bankers were confident the wave of investment into data centres has further to run, despite the market’s tepid response to the $2 billion float just before Christmas of DigiCo Infrastructure REIT, which owns data centres. That followed  the record $24 billion acquisition of AirTrunk by private equity giant Blackstone in September.

In the AirTrunk deal, Blackstone was advised by Morgan Stanley, among others, and its chairman and co-head of investment banking in Australia, Tim Church, recalled the data centre sector had been among his hot picks last year as well.

“This thematic has a long way to run, and it is having ‘adjacency’ benefits to the broader industrial markets around the globe,” he said.

“Well-located powered sites are not just beneficial to data centres, they are also beneficial for a wide range of logistics and distribution-focused tenants and landlords who own such strategic sites. So this will see large-scale industrial operators/owners like Goodman, Charter Hall, Centuria, ESR, Mirvac, Stockland and GPT all benefit.”

Also on the bankers’ priority list is the growth opportunity in residential rental, a sector becoming more diverse as it gains traction with institutional players keen to tap into the country’s desperate need for more housing.

“Japanese capital in particular seeks exposure due to the attraction of Australia’s strong relative population and GDP growth,” said UBS’s Mr McCasker.

Build-to-rent back on agenda

Along with build-to-rent – large apartment blocks owned by a fund or institution, professionally managed and developed specifically for renting – there is student accommodation and co-living, an emerging category which has been likened to modern-day boarding houses.

Also gaining ground are manufactured housing estates, also known as land lease, where residents own a pre-fab home while paying a ground rent for their site.

“We are calling build-to-rent (multi-family housing) as being firmly back on the agenda following much-needed policy reform recently passed by the [federal] government,” said Mitchell Schauer, Jarden’s managing director and head of real estate, corporate finance and markets.

Those federal reforms late last year effectively halved the withholding tax applied to build-to-rent properties owned by foreign investors, bringing them into line with the rate applied to other forms of commercial real estate.

“This is good news for domestic investors too, who would like to see significant capital crowded in and a vibrant, liquid asset class developed,” Mr Schauer said.

Critical to the prospects for commercial real estate in 2025 is when and by how much the official cash rate will be cut. The investments banks mostly tip a cut by May or the second quarter. Two years of high interest rates have hurt the valuations of commercial property, particularly for office assets, while squeezing earnings and consumer spending.

“That said, we don’t think falling rates are a complete panacea for the sector,” said Denison’s Mr Holmes.

“It might mean discount rates come down a little, and funding costs reduce, but it also means the macro environment has deteriorated. For interest rates to come down substantially, either unemployment needs to increase materially, or the consumer needs to stop spending money (or both) – neither of those outcomes would be welcome.”

High rates have been particularly damaging for the listed property sector – the real estate investment trusts or REITs – and has put them at a disadvantage to private capital – private equity funds, institutional investors, pension funds and sovereign wealth vehicles – with their lower cost of capital.

Corporate action in the listed market has largely slowed as a result, as well the launch of IPOs, with HMC Capital’s $2 billion data centre float among the few to get away recently. But that dynamic could also shift as interest rates fall and REIT stocks improve, according to the roundtable bankers.

“Given the quantum of investment capital sitting on the sidelines waiting to be invested we believe 2025 will unlock the prior hesitancy for investment funds due to their natural adversity of ‘wanting to catch a falling knife’,” Morgan Stanley’s Mr Church said.