Pluses and minuses of a 'lower for a lot longer' world

The Reserve Bank cut to the benchmark interest rate on Tuesday has minuses, as well as pluses for commercial property.

The Reserve Bank cut to the benchmark interest rate on Tuesday has minuses, as well as pluses for commercial property.

At a simplistic level, funding should become cheaper. But commercial funding is priced differently to housing finance, including a significant margin, and many recent surveys, such as the Property Council/ANZ poll point to tougher commercial finance in the year to come.

At the same time, commercial property, which has significantly higher cash returns than housing or bonds or cash, should attract more interest in the search for yield. But in times like these buyers also become more worried about the the security of that cash flow.

Cushman and Wakefield’s national director of research, John Sears wrote when the last low, CPI, came out that low inflation has mixed messages for commercial property.

“Retail sales growth is likely to be limited, though a lower-for-longer interest rate environment should help to offset this and maintain strong investor demand,” he said.

CBRE’s Australian Head of Research, Stephen McNabb, said the Reserve Bank’s move “clearly removes concerns of any near term upward pressure on benchmark rates and as a result yields on property”

“The only issue for investors is if lower rates stoke concerns about income risk,” he said. “This seems unlikely with fundamentals looking sound in a number of markets and Australia still relatively stronger than much of the world which is grappling with low growth, low inflation and ultra-low interest rates.”

If it is any guide the Real Estate Investment Trusts in the ASX 200 have lost 2.5 per cent in the last two days, with Growthpoint Properties the only REIT in the black.

It is not just an Australian issue. US fund manager CentreSquare will hold a webinar this week to discuss an investment environment where “lower for longer” has become “lower for a lot longer.”

Australian Financial Review – 3rd August 2016