Knight Frank’s Australian Capital View - September 2026 shows $14.3 billion changed hands in the second quarter, taking first-half activity to just over $23 billion - the strongest first-half result since 2022.
We spoke to Ben Burston, Knight Frank Chief Economist and Head of Research & Consulting, about how higher interest rates and economic conditions are influencing investor strategy.
Higher Rates, Different Targets
The latest figures show investors remain active, but they are becoming more selective about where they invest.
Many are looking beyond traditional core investments towards properties that offer the potential for higher returns.
That shift comes as interest rates remain higher for longer. With borrowing costs higher, investors are increasingly looking for properties where rising rents can deliver stronger returns.
The economic outlook is also more resilient than many investors expected earlier in the year. Growth is forecast to slow, but the rise in inflation and interest rates this year has been far less severe than the shock of 2022 and 2023, while households and businesses are entering the period from a stronger position.
Mr Burston said higher interest rates in Australia and globally have pushed up funding costs and return hurdles.
“Investors can now access strong income returns in fixed income markets, so they are naturally looking for property to offer comparable income returns and the prospect of capital appreciation via rental growth,” Mr Burston said.
“This is motivating a shift to core plus and value-add strategies, rather than core, and to locations and sectors that offer reliable income returns backed by fundamentals that will support future growth.”
Industrial and Retail Lead
Industrial and retail property drove second-quarter investment, attracting $5.9 billion and $3.4 billion respectively.
The figures reflect strong domestic demand and growing confidence in the market’s longer-term fundamentals.
The focus is particularly strong where supply is tight.
Industrial investors are targeting infill locations with limited new supply, while demand remains strong for prime office assets in the Sydney and Brisbane CBDs.
The report found investors also remain highly selective, focusing on high-quality assets positioned to benefit from clear structural tailwinds in the near term.
“Locations that are favoured by tenants, but without much in the way of future supply, are at the top of the list for most investors because they offer the strongest prospects of a demand-supply imbalance putting upward pressure on rents over the short to medium term,” Mr Burston said.
The thinning supply pipeline across several sectors was due to the high interest rates and construction costs and the recent softening of the cap rate taking its toll on feasibility.
“This is now driving strong rental growth in a number of prime CBD office markets led by Brisbane and Sydney,” he said.
The Return Reset
The higher-rate environment is raising the return investors expect from commercial property.
The research indicates many are now targeting returns of 10-15 per cent, compared with the 8-10 per cent benchmark typically associated with core strategies.
That is increasing the focus on properties where rental growth, strong occupier demand and limited competing supply can support performance.
Australian property is continuing to attract both domestic and offshore capital, with the research pointing to the country’s transparency, stability and improving property fundamentals as factors supporting that interest.
Improving business confidence, resilient consumer spending and continued investment in data centres is likely to support the economic outlook into 2027, although the report notes that further interest-rate increases remain possible.
“We have entered a period of renewed uncertainty over the outlook for inflation, interest rates and the wider economy, so investors will need to stay attuned to the global and local forces driving change,” Mr Burston said.
“Among these, the oil price, long-term bond yields and the extent of the expected slowing in house prices and consumer spending will all bear close watching as we look ahead to 2027.”
