Rate cut to add stability to commercial property market: CBRE

The expected improvement in consumer and business confidence on the back of the November 2 rate cut will have positive flow-on effects for the struggling retail property sector as well as provide to stability to office and industrial leasing markets, according to CBRE regional director of global research and consulting Kevin Stanley.

Stanley says there are already some “early signs of confidence returning to the household sector, which may have developed in anticipation of a rate cut and will only be further reinforced now the decision has actually been made”.

“For commercial real estate, a rise in retail spending will ultimately lead to higher turnover in retail outlets and shopping centres, which in turn will support growth in rents,” he says.

“It will also improve the viability of those retailers who’ve been feeling the effects of lower revenues and this in turn should reduce vacancy risk across the retail sector.  It may also ignite interest in leasing some of the vacancy which has emerged in the last couple of years.”

Stanley also expects the 25-basis-points cut to stabilise business sentiment toward reducing costs further, such as reducing area leased or the workforce.

“This is likely to lead to more stability in the office and industrial leasing markets, where business confidence is critical to decision making concerning occupancy.

“While the interest rate cut has flowed through to household mortgages, the cost of debt for commercial loans may not necessarily drop to the same extent, given banking exposure and attitudes toward risk in the commercial sector.

“It is interesting to note, though, that the long term cost of debt is now about 4.4% (the 10-year bond rate), which means the spread to commercial property yields is at its widest for almost 20 years – that’s compelling evidence of the current attractiveness of commercial property pricing.  It adds support to the notion there’s now plenty of room for prime commercial real estate yields to compress some.”

Overall, he says the small cut will be a “real positive for real estate”.