Alarm bells ring for commercial property

One of the fascinating dynamics in the transition to this new normal where the search for yield is dead is that many asset classes – and the investors who populate them – have yet to face up to the reality of risk-free government bonds paying annual interest rates of 4-5 per cent. Given thewill likely be around 3.5 per cent in a few months, government-guaranteed bank deposits will be offering similar returns.

This has meant that the return premium you get on commercial property above the risk-free interest rate on government bonds has dropped to its lowest levels on record. Historically, commercial property has paid a 4-5 per cent annual extra yield above Commonwealth government rates. That has recently slumped to 2 per cent or less, signalling that commercial property yields will have to rise sharply.

Then there is the fact that there are about $500 billion of fixed-rate home loans charging only 2-2.25 per cent interest rates that will switch to variable rates north of 5 per cent over the next 12 months. It is no wonder that the RBA’s boss, Phil Lowe, reckons he has time on his side. What is not clear is whether listed equities have properly priced in the reduction in earnings that will flow from a significant slowdown in economic growth as a result of this immense interest rate shock. The market may need to see hard evidence in the form of material earnings downgrades before it reflects these changes in corporate valuations.

An even more aggressive story has played out in the big four banks’ BBB+ rated tier 2 bonds, which rank behind their senior bonds, but ahead of their lower-ranking BBB- rated hybrids in the capital stack.

Ahh you want to factor in CPI increases in rents to your analysis or just pretend it’s as simple as you make out.

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Distressed housing sales rise as owners succumb to Australia’s rising interest ratesBuyers who overpaid for properties in boom market conditions now feeling the pinch, head of property investor group says Ah, investors are experiencing losses, in housing as well as shares. Always a shock to people who believed they’re entitled to expect positive returns from their investments, & prudence was forgotten. Housing’s hard to offload when the market busts too. You mean an orange brick veneer in a nothing suburb isn't worth $3M? Shocked! Shocked, I tell you!
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