Fundamental – Issue six

Welcome to our first edition of Fundamental for 2025. 

We hope you had a restful summer and are recharged for the year ahead. 

For many property fund managers, 2024 was a tough year. The high inflation, high interest rates, and high construction cost environment have placed pressure on debt covenants, development costs and delivery of projects, asset values, transaction volumes and, ultimately, on returns to investors. This has made it harder to develop new products and attract capital. While there have been pockets of performance, for example, in industrial and retail, the market has generally been challenging.  

Last year was largely a year for fund managers to reposition assets and strategies and work through any issues. 

2025 has brought with it some green shoots: inflation is trending down, the RBA has cut interest rates for the first time in years, and the total return for unlisted property funds has stabilised. 

With a pending federal election in the first half of the year creating some temporary uncertainty, it is expected the market will pick up in the second half of the year.

At the recent MSCI Australia briefings we hosted in Melbourne and Brisbane, the following trends for real estate this year were identified:

• Recovery: not everywhere all at once. The recovery is in its infancy, but investors are more selective about what real estate exposure they want and how they access it.
• Investment drivers swing back to asset selection: as we enter a new investment cycle, industry conversations are increasingly focused on shifting performance drivers and the importance of asset selection and active management.
• Underwater assets come to light: ongoing price declines and a regime of higher interest rates put in doubt the ability of some borrowers to repay or refinance their commercial property loans.
• Investors coming to grips with physical climate risk: the global economy is drifting away from its net-zero targets, adding to concern that weather events induced by climate change will become more frequent and severe.
• Investing in AI ‘picks and shovels’: the rapid development and democratisation of AI has major implications for property. One is an explosion in demand for data centres to power this emerging technology. 

You can read more about these trends in MSCI Australia Capital Trends report for 2024. Also in the property sector, our housing infrastructure team breaks down some common misconceptions around investing in social and affordable housing in our article Social and affordable housing: five investment myths. 

We are here to help you navigate these trends. 

Wishing you all a year of opportunity and success.