Real Estate

What the cash rate call means for commercial real estate markets

By Luke Dixon
Head of Real Estate Research - Real Estate Sydney, Australia

Today, we saw the Reserve Bank of Australia (RBA) keep the official cash rate on hold at 0.75 per cent. 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 per cent 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 per cent 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 of these factors impact activity and values within real estate markets broadly, inclusive of commercial markets.

Although the RBA indicated today it was in no hurry to lower rates, as it did in the lead up to today’s 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.

You can read more about broader trends in commercial real estate via our mid-year update and stay tuned for our House View

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Luke Dixon, Head of Real Estate Research
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While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

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