December 2022 direct property market update - Cromwell Funds Management
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Home December 2022 direct property market update
March 20, 2023

December 2022 direct property market update

Peta Tilse


2022 was characterised by inflation, supply constraints, and geopolitical tensions (including war), which led central banks to lift interest rates at the fastest pace in decades, and in turn softened performance in asset markets of all persuasions.

As we enter 2023, many of these factors continue, albeit at a slower pace and under the shadow of the risk of recession. Australian growth moderated in the third quarter, bringing the year-on-year pace to 5.9%, and forecasts for final growth in 2022 to 3.6%.

The December quarter saw the RBA lift rates a further 75bps with 25bps announced at each of the monthly meetings. The movements confirmed this interest rate hike cycle to be the fastest since 1994 (see red line in Figure 1).

Australia was not alone with its steep interest rate trajectory of 300bps, as other central banks also moved quickly to stamp out inflation;

  • the US Federal Reserve +425bps,
  • Bank of England +325bps,
  • and the ECB +250bps.


Figure 1: RBA rate hike cycles Figure 2: total volumes by sector
& % offshore investment
Source: CommBank, Economic Insights Global
Economic & Markets Research, Dec 2022
Source: CBRE Research


The net effect of these moves has been an increase in mortgage repayments of around 40-60% for the average borrower. Coupled with higher energy prices, this has added to cost of living pressures for most, reducing the affordability of residential property. Transaction activity in Australian commercial real estate slowed into late 2022 with CBRE reporting total volumes of $35.9 billion, compared with 2021’s $50.5 billion in 2021. The office sector formed the lion’s share of what was traded at $15.2 billion (42%).


The cash rate now stands at 3.1%, with the RBA minutes released in December indicating the RBA Board is considering for the first time this interest rate cycle the option of “no change”. This has given confidence to markets (both here and abroad) that we are indeed approaching the peak in the cash rate.


Our Cromwell inflation forecast for 2023 is 5%, which is below the annualised rate to October of 6.9%. The drivers to inflation remain as below; however, we expect to see inflation drop to 3% in 2024.


The drivers to inflation remain as below; however, we expect to see inflation drop to 3% in 2024.

With inflation moderating and interest rates stabilising, liquidity should improve and asset prices should find greater stability. The following charts plot historical Cap Rates for office, retail, and industrial vs a “real” 10-year yield (i.e. stripping out inflation) and the difference (spread) over an almost 20-year period. The inflationary effect stripped out shows the relative value of the sectors. It also explains in part the reduced volume of assets traded in the last half-year as vendors have been unwilling to re-rate pricing.


Figure 3: historical cap rates for office, retail, and industrial
Source: FactSet, JLL, Macquarie Research, November 2022


The Australian economy remains robust, despite headwinds. Employment is solid – with unemployment hovering around 3.5%, while job vacancies remain particularly high. Economic growth maintains positive momentum dominated by export demand for resources.

The RBA expects some of this to continue – with the unemployment rate to remain around 3.5% in 2023, weakening to 4.5% in 2024. While it expects inflation to peak at around 8% in 2022 (dominated by higher food prices & energy), it expects it to gradually move down to ~3% by 2024 year-end. Economic growth will slow (we expect to around 2% in 2023), but still remain positive and impressive compared to other western countries.

These factors along with business conditions at a healthy ~30 year high1 put the Australian economy and commercial property market in good stead. Businesses continue to adjust size requirements for occupancy as they live with hybrid working, although in certain markets this is now largely known.

Experiential workplaces with clever refurbishments and amenity continue to attract and retain quality tenants; something we continue to see within our assets.

In a global context, Australia is in a position of strength, with a compelling economic outlook, comparatively low inflation compared to Europe and the US and an attractive demographic profile. Oxford Economics, therefore, estimate Australia’s economic risk to be one of the lowest of the advanced economies.

This should in turn support tenant demand for good quality real estate to facilitate economic growth and cater for a growing and ageing population. Liquidity from both domestic and international capital is likely to improve. In conjunction, powerful megatrends such as the need for more sustainable, energy efficient real estate and rising demand for segments serving the modern economy such as urban logistics, data centres and highly amenitised offices will create income growth opportunities.

Figure 4: RBA and Market Economist Forecasts Figure 5: Economic risk: Australia vs advanced economies average
Source: ABS; RBA Source: ABS; RBA


How did Cromwell Funds Management fare this quarter?

The Cromwell Direct Property Fund sold Allara Street, Canberra, this quarter. The property was originally bought in July 2015 for $16.8m and was sold in October 2022 for $18.187m. Sales proceeds were used to reduce debt. Gearing as at 31 December 2022 was 36.3%. Further leasing success post 31 December at Queen St Brisbane, Creek St Brisbane, and Grenfell St Adelaide will improve the current 93.6% occupancy rate and 4.6-year WALE.

The Fund currently distributes 6.75 cents per unit p.a., or 5.29%2, payable monthly, and has generated annualised total returns since inception of 8.8% p.a. The Cromwell Direct Property Fund continues to demonstrate excellent risk adjusted returns for investor portfolios.

Performance (%) P.A as At 31 December 2022

Year Cash (AU) Bonds (AU) Shares (AU) Cromwell Direct Property Fund
1 1.25% (9.71%) (1.77%) 0.7%
3 0.55% (2.87%) 5.51% 6.1%
5 1.01% 0.54% 7.10% 6.8%

Source: Lonsec and Cromwell Funds Management


  1. NAB Business Survey – Business Conditions
  2. Based on current distributions of 6.75 cents per unit p.a. and a current unit price of $1.2755 as at 31 December 2022