11 December 2019
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What’s the link between interest rates and commercial real estate markets?

Luke Dixon
11 November 2019

Last week, we saw the Reserve Bank of Australia (RBA) keep the official cash rate on hold at 0.75%. Despite no further cuts handed down this month, this remains a record low rate for Australia.

In residential markets, where mums and dads are borrowing 80% or 90% to purchase a property, reactions to cash rate rises and falls can be quite pronounced, and the market impact is clear relatively quickly.

In commercial real estate markets, reactions are less aggressive, given loan-to-value ratios hover around 50% or less. However, the links are still clear. For example, valuations for office and logistics continue to rise in this lower-for-longer environment. One of the core reasons for this is that cheaper access to debt and financing creates a more compelling investment proposition.

A low cash rate can also be positive for the retail market. This is due to a broader economic picture – if access to credit is cheaper, and consumers are confident and spending, the retail market reaps the benefits. A cut before Christmas, which remains a possibility at the RBA’s last board meeting of the year on December 3, could have a particularly stimulative impact on the retail market. It’s important to note that retail has generally been feeling the pinch from competition this year.

In the context of commercial real estate, there would be a point that a low cash rate would no longer have a positive impact on valuations. The cash rate can be used as a barometer for the Australian economy, and if it starts to hover closer to zero, that would be a sign that key economic indicators are struggling – productivity, wages growth and GDP. All these factors impact activity and values within real estate markets broadly, inclusive of commercial markets.

Although the RBA indicated last week it was in no hurry to lower rates, as it did in the lead up to its most recent board meeting, with two more rate cuts expected between now and early next year, we see this lower-for-longer environment extending well into 2020.

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