Interest rate hikes quell commercial property FOMO

The sense of urgency appears to be leaving the commercial property market as first-time buyers exit in the wake of increased interest rates.

Examining how the commercial property sector had been impacted by recent interest rate hikes, Ray White Commercial Head of Research Vanessa Rader said the past 24 months had seen the market enjoy high volumes of sales and a growing buyer pool, but now the landscape looked to be shifting.

“Last year we saw a growing number of first-time buyers make their first foray into various commercial assets, taking advantage of low interest rates, availability of finance, and the quest to diversify during a time of economic uncertainty borne out of COVID-19,” Ms Rader said.

This increased competition and “fear of missing out” resulted in investment yields compressing across most asset classes nationally.

“Fast forward to this year and the threat and subsequent rises in interest rates has done much to dampen activity,” Ms Rader said.

“We are now seeing many of these less experienced buyers exit, as we enter a new era of savvy or experienced investors dominating the marketplace.”

Ms Rader said this change to buyer type would likely result in increased days on market, along with stable or stronger yields as buyers become more selective about assets and place greater emphasis on location, tenant quality and future opportunities.

“While auction results have still recorded quality clearance rates, overall bidder numbers are down and urgency has left for many buyers,” Ms Rader said.

“However, those assets which have transacted continue to represent good value with long-term, stable returns offering a good alternative to other investment types, such as shares, which are seen as more volatile.”

Looking to the future, Ms Rader said the next opportunity might come from investors who were still “willing to move up the risk curve”.

“Assets which are underlet or have vacancies could be an opportunity for buyers looking to capitalise on the rising holding costs for landlords,” she noted.

“’Value-add’ assets, or those with alternative development opportunities, are likely to draw attention from some investors looking to profit from changing market conditions.

“However, these assets will need to meet the market in terms of price and we may see some secondary or ‘harder to move’ assets record price reductions.”

Ms Rader said tenanted investments were expected to remain in strong demand despite the reduced buyer pool.

“The long-term, secure income stream is attractive to many, however, the spread to bond rate will become increasingly important to ensure their viability.

“Assets which were secured over the last couple of years on tight yields without premium tenancies or locational attributes could re-enter the market over the short term as financing stress may start to emerge.”

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Cassandra Charlesworth

Cassandra Charlesworth is a features writer for Elite Agent Magazine with over 15 years’ journalism experience in metropolitan and regional newsrooms. She has a specialist interest in real estate, tech disruption and a good old-fashioned “yarn”.