Australian Cap Rate Outlook December 2025

Key Points:

• Yields in Retail and I&L have tightened in 2025 off the back of lower interest rates and strong investor interest. Office yields have largely been stable with some evidence of tightening in some markets.
• The outlook for interest rates has changed in recent months. After 75 bps of cuts by the RBA in 2025, the Australian 10-year bond rate has risen which has changed the outlook for the cash rate over the medium term.
• We expect the bond rate to normalise to the low 4% range over the coming years as inflation returns to target, economic growth remains below trend and the labour market softens slightly. 
• Cap rate tightening over the next few years is expected to be shallower than previously forecast due the recent increases to the bond rate and cash rate expectations.
•  However, risk premium’s above the real bond rate are expected to be tighter than long-term averages due to the lower supply outlook across sectors and solid rental growth that is likely to emerge.