Risks for commercial property stability in the eastern states: RBA

Risks for commercial property stability in the eastern states: RBA
Risks for commercial property stability in the eastern states: RBA

The RBA has noted the trend in the commercial property market, with valuations continuing to rise rapidly in the eastern states and yields continuing to fall.

They stated, "there is a risk that if the rising valuations prove unsustainable, then price falls could see highly leveraged investors breach their loan covenants. This could trigger sales and further price falls."

The risks appear greatest for retail commercial property owners with challenging trading conditions, particularly the drought-affected agricultural sector in the eastern states, and some bricks-and-mortar retailers in the consumer goods sector.

The financial health of the business sector is "good" supported by positive economic conditions and low interest rates, however, yields on commercial property are now very low by historical standards, as growth in commercial property values has continued to outpace rents.

Risks for commercial property stability in the eastern states: RBA

The RBA noted, "this has occurred despite a slight increase in long-term interest rates over the past six months. It has resulted in further compression of the spread between returns on commercial property investments and long-term risk-free assets."

This yield compression has been evident across office, industrial and retail markets.

Risks for commercial property stability in the eastern states: RBA

The RBA theorised that "one contributor could be the long lead-time in commercial property projects, meaning supply can be slow to respond to investor demand."

It could be that the demand to own commercial property exceeds projected tenant demand, for example, if investors view commercial property as offering a more attractive return relative to the low yield on many other assets.

"This would lead to an increase in property values that is not matched by rising rents, thus lowering yields on commercial property assets. There is some support for this hypothesis from the fact that recent transaction prices have exceeded estimated valuations based on existing rental yields," stated the RBA.

According to the RBA, the banks have also noted that the current low yields pose risks to the commercial property sector.

Tags: 
Commercial Property Rba Insights

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