Parramatta Blog

The Commercial real estate industry in Australia is facing the first interest rate increase in more than ten years.

May saw the first hike in Australia's official rate since 2010 as it increased by 25 basis points to 0.35%. This comes after first-quarter consumer price growth of 5.1%, which was greater than anticipated.

The Reserve Bank of Australia (RBA) highlighted a mix of high inflation figures, low unemployment, and signs of wage growth as the justifications for the decision when it announced the rate increase, however it is important to recognise that inflation pressures are global and not local.

Australia's residential and commercial real estate markets are strong enough to sustain temporary rate increases, but geopolitical risks around the world must still be closely watched.

Retail is one industry that will likely face difficulties from increasing inflation and rising interest rates because it is still recovering from the effects of pandemic lockdowns and supply chain problems. However, despite some yield lowering over the past few years, retail asset pricing is presently more appealing to real estate investors in contrast to other sectors.

The effects of inflation on discretionary expenditure can be mitigated by factors such as a high household savings rate following the COVID-19 stimulus, a healthy labour market, the opening of Australia's borders to migrants, tourists, and students as well as the easing of COVID-19 restrictions.

Commercial property yields are typically priced off long-term bond rates, which haven't moved as much as shorter-term rates despite medium-term bond yields jumping dramatically in anticipation of interest rate increases. Investors frequently view commercial property as an ‘inflation hedge’ since many leases’ terms are based on CPI.

An inflation hedge is an investment that is considered to protect the decreased purchasing power of a currency that results from the loss of its value due to rising prices either macro-economically or due to inflation.

As a result, allocations to commercial real estate may rise, and the increased rivalry for assets should maintain a high level of price competition.

*Written by Jayden Ayoub | Commercial Sales & Leasing