Property investors should be looking for commercial assets linked to GDP growth ahead of an expected rate rise in the next 18 months, says AMP Capital Head of Real Estate Research, Luke Dixon. 

“As we look globally, we do know one thing, interest rates are only going to moving in one direction, probably in the next 12 to 18 months,” says Dixon. “We do have to start factoring this in as we look at investment opportunities across commercial real estate.”

The Reserve Bank of Australia left rates on hold at 1.5 per cent in March, the 19th straight month that it has left rates unchanged. Investors are on watch though, for signs of inflation as business confidence and capital expenditure have both risen, and jobs growth is strong.

The good news for commercial property investors is the very thing that triggers rate rises – such as stronger economic conditions – can lead to strong commercial property valuations in sectors linked to these gains.

“When people think about interest rates on their homes they think about costs going up,” Dixon tells AMP Capital TV. “But in commercial real estate we think about things a little bit differently. Commercial real estate can benefit from strong income growth.”  

In the office market, assets with long lease terms in central locations, particularly around strong transport and infrastructure, are going to benefit, Dixon predicts.

In the industrial sector, e-commerce is driving demand for logistics hubs, and for property to house other discounted large wholesale goods.

The retail sector can be negatively impacted as higher rates crimp household budgets, so Dixon recommends a focus on non-discretionary goods like food.

Key to profiting during a higher interest rate environment is looking for assets with long-term rentals in place.

“For investors looking at commercial real estate, investing through a higher interest rate cycle is something you need to do with a long-term view,” says Dixon.

 “When you look at the office market you want to look at assets that have a five to ten-year lease term,” he says. “Assets with shorter lease terms tend to not benefit as strongly. You get higher rents in the short term but leaves you more exposed to volatility across the market. This is true across the other asset classes too.”

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