January 12, 2018 - Peak Equities

Commercial Property Market Insights – Peak Equities

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2017 has seen the maintenance of record-low interest rates, and yields for quality assets continuing to compress throughout the year. Since the middle of the year, the major banks have restricted their lending against commercial properties, increasing their charges and lending a lower percentage of value. This has had the effect of increasing bank profits, but has done nothing to subdue the market.

Our view is that the commercial property market remains in a sound position. At its core, the property market is subject to demographic trends. Population growth creates demand, which must be satisfied. We are also seeing a significant number of commercial sites being converted to residential and student accommodation. The limited supply in key locations provides strong under-pinning for the market.

The current margin of 400-500 basis points between cash rates and commercial property yields is in line with historical trends. Australian property yields remain far higher than in many overseas jurisdictions (principally Europe and Asia). It is also of note that Australian institutions hold a much lower percentage of their assets in real property than do their counterparts overseas. These factors mitigate against a decline in asset values, and with our dollar holding in the 70’s and interest rates remaining relatively low, we foresee a period of stability ahead.

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