Interest Rates, Australia 10-Year Bond, Weaker AUD where to from here?

With the Reserve Bank of Australia (RBA) raising the Official Cash Rate on Tuesday by 25bps to 2.6%, commercial property investors and developers will be looking to reassess where they see real value and how much risk appetite they are willing to accept. The rate hike marks the sixth rise from the RBA since May this year, with most economists predicting further rate rises over the coming 6-12 months, with the Official Cash Rate potentially reaching circa 3.5%. 

The higher debt financing transaction cost creates challenges and opportunities for investors and developers. Investors continue to take a flight to quality approach, with the tenant covenant and WALE being the two major considerations. Essential services-themed properties hold their value and remain a hotly contested asset class. Sub $10m commercial properties continue to be well received, with cashed-up investors taking conservative levels of debt with some paying all cash. Most institutional investors have been reassessing their acquisition requirements to maintain their historic target distribution yield and total return hurdle.

With most ASX-listed real estate stocks being hit hard over the last 12 months, some investors are moving out of equities and into hard assets. These investors are looking for long-term passive income and value-add opportunities to extract a higher yield and valuation upside upon repositioning.  

Traditional developers have narrowed their focus to premium development sites where they can secure a higher level of pre-committed leases or sales. Developers are seeking higher returns to offset the higher costs of financing projects and construction cost challenges. Residential developers are starting to become more active due to the supply crunch, historically low vacancy rates and increasing demand from investors. 

Investors will keep a sharp eye on the Australia 10-Year Bond yield and look for opportunities with an appropriate risk premium to justify their investment decision. The 10-Year Bond yield currently sits at circa 3.72%, well above the 1.77% level we saw in January this year. 

The weaker Australian Dollar (AUD) will likely spur foreign investment from some countries. With the AUD at a 2 year low to the USD, cashed-up investors will likely take advantage of our weaker dollar, slightly higher property yields and increasing deal flow. Active investors from Singapore and Hong Kong, whose currency has strengthened against the AUD, will likely lead the charge. We have seen this story play out many times before.     

The shift in the market will see most investors and developers reset, reassess and move forward. Whilst some will adopt a sit-and-wait approach, savvy investors and developers will soldier on looking at the current market as an opportunity, not a risk. The fundamentals of the Brisbane market are solid; the infrastructure boom, population growth and transformation underway in preparation for the 2032 Olympic Games is creating an enormous real estate opportunity for investors and developers.