After a prolonged period of high interest rates, commercial property investors await the Reserve Bank of Australia’s (RBA) first cash rate cut.
For much of 2024, commentary suggested the first cut would happen in mid-2025. But, following a softer-than-expected inflation rate in November, speculation is growing that the RBA may cut internet rates sooner.
According to the Australian Bureau of Statistics (ABS), the annual inflation rate fell from 3.5% in October to 3.2% in November. This brought inflation closer to the RBA’s target band of 2-3%.
Forecasts from the big four banks
This news led to increased speculation and forecasts from various financial institutions, including the big four banks, regarding the future trajectory of interest rates and their subsequent impact on the commercial property market.
ANZ
After sticking with the May 2025 prediction for much of last year, ANZ revised its opinion after the latest inflation results, speculating that the RBA could cut rates in February 2025. “We think this will be enough for the RBA to cut the cash rate by 25 basis points at its February meeting, rather than waiting until May,” said ANZ’s head of Australian economics, Adam Boyton.
Commonwealth Bank (CBA)
CBA has been steadfast in its prediction for a February cut, believing that inflation was softening enough to warrant an earlier cut. In December, unemployment rose slightly from 3.9% to 4.0%, according to the ABS. This, coupled with softer inflation, supported CBA’s view that the RBA would be satisfied that the economy had cooled enough to start cutting rates. “We stick with our call for the RBA to commence an easing cycle in February with a 25bp rate cut,” said CBA.
NAB
In January, NAB CEO Andrew Irvine said Australians can expect some economic relief in 2025. The bank predicts the RBA will begin cutting rates in May, with two further cuts during the year.
Westpac
In November last year, Westpac pushed its prediction for a rate cut out from February to May. And, after the release of the most recent monthly inflation data, the bank has stuck with this expectation. But, Westpac also predicts that after the first cut in May, a second one will follow immediately after in June. “That would follow a similar pattern to what we’ve seen from international peers including the Federal Reserve and RBNZ and mark an acceleration from our previous forecast of one cut per quarter,” said Westpac’s economic spokesperson, Luci Ellis.
Impact of rates on the commercial property market
The prospect of lower interest rates has significant implications for the commercial property market. As financing costs decline, the appetite for new acquisitions is likely to increase, creating opportunities for investors to re-enter the market or expand their portfolios.
Changing yields
With some investors waiting for the first cut to begin buying property, this could be the trigger for more investment activity.
Currently, the difference between the return investors get on commercial property and the return they get on cash investments is low (between 0.5% and 1.5% higher), according to Ray White Commercial. Lower interest rates could close this gap even further.
Market confidence
According to the Australian Property Investor magazine, although rates have not yet fallen, the idea that a cut is coming has already spurred market optimism.
This positive sentiment, coupled with the country’s growing population, is likely to fuel demand for well-located commercial assets.
And, as businesses become more confident in the economy, this will add to the momentum. According to Roy Morgan Business Confidence, the index has measured above 100 for three consecutive months, the first time this has happened since the Albanese government took office in May 2022. A score of 100 represents neutral sentiment; anything below is negative; and anything above is positive.
With confidence up, tenants are more likely to be eager to expand and upgrade their premises.
Overall, investors could benefit from renewed interest in the commercial sector both from a thriving rental market and from improving yields.
As a leading commercial buyer’s agency, Costi Cohen helps investors acquire premium properties in key markets nationwide. Contact us today to find out how we can support your investment goals on [email protected] or 02 8934 3414.
