Australia’s cash rate is at a historic low, with another cut made in July’s Reserve Bank of Australia (RBA) meeting. As a result, returns on term deposits and savings accounts are barely keeping up with inflation.
However, the current low-rate environment is great news for investors with exposure to commercial property, as it benefits the sector in many ways both directly and indirectly.
Commercial property values across Australia have enjoyed a run of stellar growth in recent years and are continuing to climb on the back of rising rentals and a surge of fresh investor interest in one of the few remaining asset classes that still produces consistent, competitive returns.
Commercial properties in Sydney and Melbourne are in such high demand that investors are now looking to Brisbane, Perth and many regional centres for new opportunities and 2019 has seen a flood of money into commercial property-related investments such as property developers and funds listed on the ASX.
The health of the sector is so impressive in today’s low-return world that it is attracting international attention. For example, US private equity giant Blackstone Group was revealed in June as the buyer of the office towers above Westfield Sydney for $1.52 billion, in one of Australia’s largest-ever property deals.
A boost to economic activity
The Reserve Bank of Australia reduced the cash rate to a historic low of 1.25 per cent in June and even more recently, 1 per cent in July.
But why is the RBA cutting the cash rate? It could be to give the Australian economy a boost, encouraging consumers and business alike to both spend more thanks to higher discretionary income on the back of falling mortgage repayments and borrowing costs.
The resulting ‘virtuous circle’ of economic activity will flow through to higher levels of spending and investing in many sectors, all pointing to continued strong gains for the commercial property sector, which is one of the first to benefit when businesses experience growth.
Higher returns for investors
Falling cash rates can also flow through to lower borrowing rates for commercial property developers and owners. If a commercial property investment is geared and all else being equal, lower interest rates could mean that the debt-servicing costs reduce for the current owner.
And for developers with plans for future commercial developments still on the drawing board, the falling cost of borrowing could change the equation. Projects which may have been left on the back burner because of uncertainty about their financial viability could become more attractive, and expectations of returns from projects already under way could be revised further upwards, increasing their valuations.
A foot in the door for smaller investors
In comparison to residential property, commercial property can provide investors with significant benefits. It delivers greater rental certainty due to longer lease periods, and many maintenance and other ongoing costs on commercial properties are usually paid by the lessee, which means net rental income tends to be higher.
However for smaller investors, the commercial property market can appear daunting. While most people have some experience of the residential property market, whether as tenants or owners, the same cannot be said of the commercial sector, which is much more diverse and may include anything from car parks to office blocks, shopping centres and factories.
However, property funds and mortgage trusts and other pooled investments are an easy way for smaller investors to participate in the commercial property boom, combining many small holdings to achieve the critical mass needed for large transactions.
The success story of Australia’s commercial property sector could therefore be within reach for investors large and small, as part of a diversified investment portfolio.
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