Increases in the official cash rate can directly result in higher returns for commercial real estate (CRE) credit investors provided margins remain stable, according to Qualitas.
Qualitas head of income credit Mark Power said he expects the substantial unfulfilled demand for housing to counteract the effects of increasing interest rates on the value of residential properties, thereby creating an additional boost for sustained growth in the commercial real estate sector.
Moreover, turning to loans amid an increasing interest environment, the investment manager reported a healthy loan risk profile.
“The market is expecting interest rates to continue to increase in the first half of this year, and we are looking at all loans with a laser focus,” Mr Power commented.
“In this environment, we remain vigilant in assessing risks and are frequently repricing our loans given the short tenor of circa 12 months and converting existing fixed loans to variable loans so that increases to the interest rate are passed onto investors through higher distributions.”
Additionally, according to Mr Power, commercial real estate investors have been taking advantage of the expanding credit spread over the last half-year, which is anticipated to continue to widen in the coming year.
Unprecedented supply shortfalls
Turning to supply, Mr Power pointed to an emerging, substantial disruption in the market.
Namely, he noted that while it’s estimated that around 50,000 high-density apartments will be needed annually in the major cities of Australia over the next three years, predictions indicate that only 19,000 apartments will be constructed annually during the same period.
This, he noted, will lead to a delivery of apartment stock that will reach a 16-year low by the fiscal year 2025.
At the same time, vacancy rates across the country are at all-time lows, with the national vacancy falling to 0.8 per cent as at January 2023.
“A vacancy rate of 3 per cent is considered as a market in equilibrium, and having such a low vacancy rate is indicative of the high rental demand and the very limited housing supply across the country,” Mr Power explained.
Looking at the upside, he noted that property developers are beginning to position themselves to meet this unprecedented shortfall.
Moreover, the shortages, he noted, represent a “significant opportunity” to assist developers in acquiring new sites or provide capital so they have greater liquidity to meet pre-development costs.
“While there is negative noise currently in relation to the residential property market, we see the residential apartment market as being quite resilient in the next 12 months, following which capital growth is expected to resume in 2024 as the increase in interest rates is absorbed and the impacts of the housing supply crisis become apparent,” Mr Power concluded.