Will Interest Rates Affect
Commercial Yields?
Posted on 07. Apr, 2010 by Chris Lang in Economic Issues, Global Scene, Industrial Sector, Interest Rates, Investment Objectives, Offices, Property Yields, Residential vs Commercial, Retail Sector
Yesterday, the RBA confirmed an upward bias with its latest rate increase.
This table from today's Financial Review seems to sum up the RBA's position fairly well.
Residential property prices are still surging (particularly in Sydney & Melbourne); and our commodity exports have also regained their momentum.
As such, the RBA has decided that Australia is in full recovery mode. And the cash rate ought now be approaching 'neutral' territory — being between 4.75% and 5% per annum.
So what does that mean for Commercial property?
The RBA is aiming to slow the Residential market by increasing mortgage rates. And with consumers having less to spend, this will affect marginal Retail properties during the second half of 2010.
As Retail activity slows, so will the demand for Industrial space — but with about a 6-month lag.
However, an 80-year study by BIS-Shrapnel has found that rising interest rates have little or no direct effect upon Offices — particularly suburban Offices.
It seems Offices are primarily affected by an oversupply or a poor economy — as you saw during 2008/09.
But what many people don't fully understand is that your total return from Commercial property (ie: your Passing Yield plus Capital Growth) is generally the same for ALL three Sectors.
Sure, the split between income and growth may vary between the Sectors — but all up, it is more or less the same. And historically, that seems to total to around 14% per annum.
Some people seem to get fixated on buying a property with a high passing yield. However, that then means you are actually foregoing some good capital growth.
Therefore, you need to be careful to striking a balance.
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