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For commercial real estate investors, the year began with optimistic caution. That, it turns out, was warranted. The recovery that began last year was abruptly disrupted by conflict in the Middle East and sticky inflation, which remains above the Reserve Bank’s target range.
As highlighted in Dexus’s research report, Capital Foresight: Era of Dispersion, “assets with poor fundamentals continued to slide and weigh on portfolio return. Investors saw it with their own eyes, in their own portfolios: the increasing dispersion of performance.”
With the gap in asset performance continuing to widen, this alone makes a powerful case for active management. This is not a time to pick a sector or an index and hope for the best. The environment demands a depth of understanding like no other.
This is especially true given the five structural forces that will impact Australian real estate over the next cycle. Together, they will reward careful asset selection over broad sector assumptions. It will pay every real estate investor to understand them.
Australia’s population is forecast to increase by 1.7 million people over the next five years. As much of Europe and Asia face a flat or falling population, no developed country comes close to Australia’s rate of population growth.
Source: UN World Population Prospects 2024 medium variant, Dexus Research
This is a powerful starting point for thinking about real estate investing because each additional person needs somewhere to live, work, send their kids to school and shop, and each journey between these places requires infrastructure.
But it is not sufficient. Population composition also matters. Australians aged over 65 will be the fastest growing cohort over the next decade and those over 85 will more than triple by 2063. They will require more healthcare, retirement living and aged-care services.
Australia is also home to 800,000 international students, the second highest total in the world. This creates demand for well-located purpose-built student accommodation (PBSA). At the same time, with population growth concentrated in major cities, there is pressure to provide denser developments around transport and established services.
The investment case, therefore, is not simply about ‘more people’; it is about understanding who those people are, where they will live and what services they’ll require.
A population tailwind is not in itself an investment green flag. Strong demand only supports investment returns when supply fails to keep pace with it. In some sectors, this is already occurring.
Construction and financing costs have risen, planning approvals take time and, in established locations, suitable land is scarce. At current rents, many proposed projects no longer make financial sense. They are either being delayed or cancelled altogether. Historical data points to the shortfalls.
Source: Dexus Research
Where demand is increasing and supply is constrained, rents are likely to increase. The effect is likely to be most pronounced in locations where competitors cannot easily build. For example, offices in established CBDs, dominant shopping centres and industrial properties are set to benefit.
Investors must distinguish between sectors facing a genuine supply shortage and those attracting new construction that can satisfy demand. Dexus has highlighted seniors’ living and PBSA among the assets developing pricing power due to constrained supply.
Artificial intelligence (AI), automation and digital services do not remove the need for real assets but they are redirecting activity towards buildings and infrastructure better able to accommodate new ways of working.
In logistics, automation favours modern warehouses with power supply and layouts that deliver efficiency dividends not available in older facilities. Premium, collaborative offices will remain resilient while back-office markets are exposed to weaker demand and footprint reduction.
Because technology is reallocating demand, investors must look beyond sector labels and ask whether an individual asset enables high-value activity or gets in its way.
Productivity entails producing more from the same time, labour and capital. If AI lifts productivity, as many businesses expect it to, companies should grow faster and more profitably, wages should rise and households should spend more.
Were productivity to improve by 1.6 to 1.8 percentage points a year, it would significantly surpass the IT boom of 1995-2005, a period when the so-called Magnificent Seven hit their straps. Even sustained productivity gains of 1% a year would materially increase real wages and household spending.
For commercial real estate, a productivity-driven recovery would be different from those of the recent past. During the 2010s, property values benefited as interest rates and market yields fell.
But in an economy with growing productivity, interest rates may remain higher for longer. The implications for investors are significant; returns will need to come more from growing rents, improving occupancy and active management of buildings than lower rates.
This may mean investors should consider prioritising active over passive strategies and equity over fixed income. Real assets more exposed to higher discretionary spending are also likely to do better, as should infrastructure and experience-based retail formats.
Productivity will not benefit every property equally, but assets able to grow alongside the economy should be better placed than those offering fixed income and little room to adapt.
Commercial property is largely an investment in an income stream. Leases are contractual and long-term, rents typically rise with or ahead of inflation and revenue is reliable. All of that is to say AREITs and GREITs are classically defensive assets, with growth potential.
As we explained in Mispriced in Plain Site: The case for Global REITs, booming equity markets have seen many investors underweight real estate. This applies as much to Australian investors in REITs as it does with a global orientation.
Moreover, the defensive characteristics of AREITs are currently available at compelling prices and positioned to deliver attractive risk-adjusted returns, in our view. While this is a good time for investors to rebalance their portfolios, lock in some equity gains and increase their exposure to real assets, these five structural forces mean that an active approach is necessary to maximise returns. Not all property is created equal and it could be costly to assume otherwise.
*Unless stated, all data included in this article is attributed to Capital Foresight: Era of Dispersion, Dexus, 2026.
Australia is now home to the world’s tallest hybrid timber tower, with Atlassian Central reaching its full height of more than 180 metres in Sydney.
In the last seven months, Dexus has made the case that many Australian Real Estate Investment Trusts (AREITs) are trading at discounted valuations (see AREITs: The case for stability and growth and Through war and economic adjustments). Many AREITs remain undervalued.
Dexus Wholesale Property Fund (DWPF) has raised more than $600 million in new institutional investments, including a $500 million commitment that represents one of the largest single investments made in an Australian open ended property fund.
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Due to rounding, any numbers presented throughout this presentation may not add up precisely to the totals provided and percentages may not precisely reflect the absolute figures.
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