Commercial Property and Interest Rates

Commercial Property + Interest Rates

THE RBA RECENTLY confirmed a neutral bias, when it announced its latest decision to keep the official interest rate on hold.

Inflation appears to be relatively steady — and still well within the RBA’s stated band for comfort.

Furthermore, the feedback from the Residential market is that house prices in Sydney and Melbourne now appear to be levelling out.

The RBA was keen to see the Residential market slow somewhat. However, if that doesn’t remain the case, it may need to look to increase in interest rates.

In any event, the RBA has now signalled the next direction will be upwards from here. And the first sector to be affected will be Residential property, as mortgage payments increase.

What does that mean for Commercial property?

As the interest rate rises, consumers now have less to spend. And this quickly impacts upon retail sales — which in turn, can adversely affect the appeal of Retail property as an investment.

Generally, this decline in sales tends to occur with a 3 to 6 months time-lag, from when interest rates start to rise.

Right now, retailers are already reeling from poor trading profits — through a combination of the impact of growing online sales, plus the recent influx of competition from some major overseas traders.

Therefore, any increase in interest rates from here will only serve to further affect the profitability of an already struggling Retail sector.

As you will appreciate, the Industrial sector is principally logistics and distribution. Therefore, as Retail activity slows, you generally see a flow-on effect for Industrial storage space. And?previously, this?has occurred with a further lag of about a 6 to 9 months.

However, with greater diversity of users now seen within the Industrial sector, any impact is likely to be far less severe than before.

How will the Office sector be affected?

As interest rates begin to rise, they will have little (if any) effect upon the Office markets around Australia.

This was apparently confirmed by an 80-year study conducted by the BIS-Shrapnel … which confirmed there was actually no correlation between interest rates and the well-being of the Office sector.

Rather, any fluctuations are driven purely through demand and supply of space — which is primarily related to the health (or otherwise) of the Australian economy.

Bottom Line: Despite the intrinsic appeal of Retail investment property, you need to be mindful of the underlying strength of your tenant (and the lease covenant) going forward.

Industrial property will prove to be a solid investment. However, your real growth will be seen within the Office sector — both in the CBD and suburban office markets, which are currently heating up.