The last few years have presented challenges for commercial property investors. With interest rates climbing to combat inflation, many have seen their income returns dip and commercial property values plateau. As the market shifts and interest rate cuts loom, uplift is on the horizon.
2025 Outlook
Broadly, economists forecast that interest rates will drop in the first half of this year, possibly as soon as later this month, marking a critical turning point for investors. This shift presents a unique opportunity to position yourself for both immediate income gains and long-term capital growth.
Here’s why the upcoming interest rate cuts matter and why now is the time to act.
Key Impacts of Interest Rate Cuts
1. Higher Income Returns
Incomes generated by commercial property funds that are leveraged with debt are closely tied to interest rates. When interest rates are high, the actual cost of the debt is increasing, which in turn lowers the income returns for investors. As the cost of debt reduces, the income that flows from the property funds will increase.
2. Falling Term Deposit Returns
As interest rates drop, so do the returns of various investment options such as term deposits. Investors therefore look for alternatives and often look to commercial property, thereby increasing competition in the market.
3. Increased Property Values
As market competition increases, so do the values of the underlying assets. In Perth, where demand for quality commercial properties remains strong, this correlation is even more pronounced. A small shift in rental yields can significantly elevate property valuations.
Getting ahead of the curve
Waiting for interest rate cuts to take effect might seem prudent, but history tells a different story. The strongest returns often come to those who invest ahead of the curve. By securing a foothold in today’s market, you position yourself to reap the benefits as conditions improve.
Looking at the historical relationship between interest rates and commercial property income returns provides valuable insights. During previous rate-cutting cycles, Australia’s commercial property market saw a sharp uptick in both income and asset values – underscoring the cyclical nature of the market.
For context, the average annual return on commercial property in Australia is between 5% and 12%, depending on location, type of property and market conditions. Investors who enter during downturns often achieve superior long-term results compared to those who wait for the market to recover.
Our rigorous due diligence ensures that every property we select is poised for strong performance, even during times of uncertainty. However, understanding market cycles can enhance your returns. With interest rate cuts on the horizon, income returns and property values are set to rise, making now a great time to consider commercial property within your investment allocation.