Blog - Commercial
The Impact of Falling Interest Rates on Commercial Real Estate
Australia’s Economic Position
The Australian cash rate has been in an expansionary cycle since 2011. The cash rate is now at its lowest level on record at 1% (see below). Consequently, commercial real estate investors are under increasing pressure to invest in A-Grade assets as economic conditions have deteriorated.
In a previous blog, we discussed how Australian Real Estate Investment Trusts (REITS) performed over a one-year period ending in mid-June 2019. 7 REITS appreciated over 20% during that period: Charter Hall Group, Charter Hall Long WALE, Dexus Property, Goodman Group, GPT, Mirvac Group and Viva Energy. Most of these REITS own A-Grade CBD assets. The worst performing REITS (Unibail-Rodamco Westfield, Vicinity Centres and Scentre) own lower grade assets with higher tenancy risk and exposure to the Australian economy. These 3 REITS all fell over this same period, with Unibail-Rodamco suffering the greatest fall (-23.7%).
Furthermore, former Prime Minister, Kevin Rudd, recently argued that Australia has a one-in-three chance of recession in 2020. A recession would devalue Australian government bonds because of perceived increased risk. Therefore, government bonds could be a very poor investment.
Where to Invest in this Environment?
Superfunds across Australia manage around $2.7 Trillion. This is larger than Australia’s GDP! Superfunds are struggling to find yields without taking on higher risk. Ten years out from the GFC, many investors believe the Australian stockmarket is too expensive. As shown below, the ASX is the third most expensive stockmarket in the world (based on PE multiple):
The hunt for yields without taking on high risk will likely bring superfunds and other investors to A-Grade commercial property as well as prime residential real estate. During periods of low economic growth, the best performing assets are those that have the highest security. Further details on what drives value in real estate can be found here.
The Attractiveness of Commercial Real Estate
Grade A commercial property continues to yield up to 5% in some capital cities. This is 5X higher than the Australian cash rate and almost 5X higher than the 10 year Australian government bond yield (1.13%). Yields in Sydney and Melbourne are lower but remain at strong premiums compared to other low risk assets. Residential yields are lower but still more attractive than deposit rates (the highest deposit rates available at the moment are a measly 2%).
Other Considerations for Investments
Remember: Though the return on investment is an important consideration when investing in commercial property, there are many other factors that need to be reviewed. If you’re a first-time buyer, educate yourself with these 5 commercial property tips for first-time buyers or use this checklist to make sure you’re fully prepared before you buy. You can also use this article as a guide to commercial real estate tax.
Already a seasoned investor? Find out why it’s important to diversify your commercial property portfolio.
TGC has access to a variety of office spaces in Sydney and an experienced team of commercial property experts who are happy to answer any questions. Email us or call on 1300 458 800.
Not sure whether to buy or lease commercial property? Weigh up the pros and cons here.