Any softening in investor sentiment for commercial property is expected to be temporary, according to JLL director and economist Ronak Bhimjiani.
Rate Rise Reinforces Focus on Rental Yields
Mr Bhimjiani said the latest rate rise reinforced a focus on rental yields but would not undermine the broader trajectory in commercial property.
“Another interest rate hike extends the higher-for-longer interest rate environment but it’s unlikely to materially disrupt the sector’s trajectory given asset values have already undergone a repricing to reflect higher borrowing costs and investors are now operating with these settings in mind.”
Higher construction costs mean that existing, income-producing assets become even more attractive as investment propositions because it would cost more to replace them.
While a “wait and see” approach was likely to kick off in the residential market as buyers re-evaluated their borrowing capacity and sellers waited for sentiment to rise, the major consequence in the commercial sector was a stronger investor focus on rental yields.
Income Resilience Key for Investors
“With the cost of capital now structurally higher, the primary focus for astute investors is income resilience.
“We expect commercial real estate investors to target assets where strong rental growth can provide a partial hedge against inflation and offset higher borrowing costs,” he said.
Mr Bhimjiani said it was uncertain when inflation would return firmly and sustainably to the target 2 to 3 per cent target band — which would prompt a rate drop — there was a chance it could get worse before it gets better.
He said investors should plan for a “higher for longer interest rate environment”.
“The market is not pricing in any interest rate cuts in the near term, and investment decisions should be based on the current cost of capital, not the hope of future relief,” he said on Tuesday.
RBA Decision Necessary to Anchor Inflation
“Today’s decision by the Reserve Bank of Australia to lift the cash rate by 25 basis points was a necessary step to re-anchor inflation expectations, which may otherwise lead to even higher future inflation.
“The RBA operates under a dual mandate, keeping inflation at 2-3 per cent while ensuring full employment.
“The labour market has proven to remain resilient, with the headline unemployment rate relatively low at 4.3 per cent.
“This provides room for the RBA to act decisively on containing current inflationary pressures.”
He said inflation was due to a complex interplay between total demand in the economy outpacing our ability to supply goods and services, which fuels inflation.
“Interestingly, for commercial property, this strong demand is precisely what underpins the rental growth we’re seeing in sectors like logistics and retail.
“It creates the very income streams that investors are seeking out in the current environment.”
