The Reserve Bank of Australia’s recent decision to lower its cash rate signals a significant shift for the commercial property sector, though its immediate impact may not be felt as directly as many expect. While commercial property finance is not directly influenced by the RBA’s cash rate, the move is seen as a key milestone in the ongoing transition towards a more stable and potentially cheaper cost of debt.
Despite the RBA’s rate cut, which offers a boost to consumer sentiment, the cost of borrowing for commercial property investors was already on a downward trajectory. “The decision to reduce the cash rate marks a psychological shift for investors,” said Ross Du Vernet, CEO of Dexus, noting that it adds confidence to a market that has been anticipating more stable finance costs for some time.
Jean-Pierre Alouan, a director at LINK Commercial Mortgages with over 25 years of experience, suggests that the rate cut signifies the end of the anti-inflationary cycle, ushering in a period of economic growth. However, Alouan cautioned that commercial property investors would not see an immediate reduction in their debt servicing costs. Instead, the industry will experience gradual shifts in property yields and values.
The effects of this change will vary across different sectors and locations. Knight Frank’s chief economist, Ben Burston, described the RBA’s move as a turning point for commercial property markets, though he noted that recovery would not be uniform. “The pace of recovery will differ depending on the location and sector,” Burston said.
Debt costs in the commercial property market have already been trending down, as shown by the recent decline in the 90-day Bank Bill Swap Bid Rate (BBSY), a key benchmark for pricing commercial property debt. Additionally, the growing competition among lenders has led to lower margins, further reducing the overall cost of borrowing.
However, the pace of these changes will not be immediate, and some segments of the market could face rising debt costs. Listed Real Estate Investment Trusts (REITs) that have hedged their debt may find that their borrowing costs rise in the coming year, as highlighted by Citi’s forecasts ahead of REIT results.
The increased competition in commercial property lending is largely driven by the rise of non-bank lenders. Mark Wizel, director of Advise Transact, expressed concerns about the uncertainties surrounding non-bank lenders, especially regarding their exposure to the commercial property market. At the same time, domestic banks have increased their involvement, contributing to greater competition and tighter margins.
Andrew McCasker, managing director of Debt and Structured Finance at CBRE, noted that domestic banks are becoming more competitive both in terms of pricing and appetite for commercial property loans. The Commonwealth Bank has notably increased its exposure to commercial property by 4% to $98.4 billion, while Westpac reported a $1.1 billion increase in commercial property exposure for the December quarter.
While large banks have been cautious and disciplined in their lending, Michael Wood, CEO of Madigan Capital, emphasized the importance of deep due diligence when investing in commercial real estate debt, especially for non-bank managers.
The new financial landscape has led some to hope for a boost in housing supply, particularly in the first homebuyer market. However, experts like Beau Quarry, managing director of Solido Development Finance, believe the rate cut will have minimal effect on construction finance and the viability of many projects, though it may help improve sentiment among potential buyers.
Ultimately, while the rate cut may not immediately affect the cost of development finance, it is expected to boost buyer sentiment, particularly for well-leased investment properties priced below $20 million. Looking ahead, there may be a shift from commercial property debt towards equity investments, as returns on debt are likely to contract.
According to Cathy Houston, managing director of MA Financial, “Private credit has had its moment in the spotlight, but with rates now reducing, we might see some movement towards higher-yielding investments.” Alouan predicts that investors will begin reallocating funds from low-risk bonds to higher-yielding commercial property as market conditions evolve.
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