Interest Rates on Commercial Property

I’m wondering something similar myself. I’m in the market as an SMB owner occupier and have been looking to purchase for the last 12 months. I wonder if the older hands would buy at these prices or what that cohort is currently thinking about the prices/valuation/cap rates that are being thrown around.

 

@SeanR - you're in the envious position of being able to buy a vacant property to meet your needs, most punters/small investors in the market want the reduced risk of an occupied premises & will pay a 1-2% premium for security and to facilitate financing.[/QUOTE]

 

Do those anz, boq and macquarie loans require annual revals?

 

Last year I was dealing with a broker who had 15 years experience at a major, he advised that if you were paying P&I then it would be unlikely that re-vals would be required. That is my memory of our conversations at least. I’m about to find out tho as I have docs in with a lender now for a different property.

@Scott No Mates cheers and got you on those points. The only issue is actually finding a property that is available, market has been so tight where I am for the last 12 months. I was almost in on a mid-size property mid last year due to another party potentially pulling out of their contract, they ended up going ahead tho. Since then there has not been one suitable option come up within that 3 suburb area, so very frustrating in that regard.

Things moved quickly this week though and I’ve got a contract on a larger property but not really in my main target zone. There are multiple tenants in there so just assessing if I want to keep them all, or keep some and move in myself. There is some potential for development upside (not massive though) which we are also working through. Pretty nerve-wracking all in all as it’s my first time.

 

Have had commercial loans with the major banks for 27 years .
During this period (mostly P & I ) refinancing new acquition using equity I was required to provide valuations on the new addition to the portfolio and they would cherry pick one or two of properties for valuation update.
On the current new facility (usually three to five years facility) they have selected one property in the portfolio to be revalued each year (all over $10m properties).
Financial accounts, LVR, rent to interest ratio , WALT etc are reviewed annually.
During the loan period we have the "15% notifiable event" like tenant (s) over 15% of the portfolio not renewing. This could trigger a review.
Retiring in 2006 was a " notifiable event" and the bank reviewed my facility (they could have called in the loans ) and given me a choice continue working or pay the loans off !

 

Yep got you. I’m using cash not equity but understand the gist. I’m not playing at those levels but still reasonably significant, just hope it doesn’t become to much of a distraction.

 

Hey brains trust!

I wanted to see what peoples opinions were.

When interest rates rise is it fair to assume that CP's purchase prices will fall to ensure that the return is "worth it"? Or do you think that there will be a significant rental increase to cover the additional interest charged on the mortgage?

What has happened in CP in the past when interest rates climbed?

 

You’ve got to consider why there is an interest rate hike in the first place.

Traditional economics theory would be something like: the economy is very strong > inflation rises > therefore it needs controlling and interest rate rises > CIP should do well since business demand and growth expectation will be high and can command higher rent.

If the inflation is driven by more modern monetary policies it would be money printing > value of currency down > inflation > rate hike > your rents should rise accordingly.

You have to remember most commercial leases will be indexed to CPI or 3% auto increase even without signing a new lease. The main thing to look at is the strength of the economy and the demand for your asset as that will drive the biggest risk which is not being able to re-let or tenant defaulting since there’s so much risk mitigation on the other factors. The purchase price is going to be impacted a lot more by economic confidence and GDP growth than it is by a small interest rate that is onto there to avoid extreme Ievels of inflation driven by businesses you are leasing to jacking up their prices.

 

@Kriv do you on commercial property? Are you speaking from real world experience?

I think the question above is valid, it’s also something I have been wondering. Most tenants are on decent length lease terms, with options. You can’t just jack the rent up randomly. Happy and open to hear input from others more experienced on here.

 

Yes I do but I don't have a long history on it so someone else like @Beano who has been at it for decades can answer the question on past price/rent behaviour in interest rate rises. I'm merely pointing out that it's not just the interest rate you'd have to look at to understand how it impacts CIP, but rather the underlying economic and monetary causes of the raise.

To your point on rent, you certainly can't, though if you're on shorter 3-5y leases then you can always re-adjust if you can re-let, and if you're on very long term leases then you certainly should have clauses for yearly nominal or CPI increases, and that's just a contractual agreement not a new negotiation.

 

Currently I have two commercial properties so relatively new in this space. For one, I have a set yearly increase and the other it's based on CPI.

I had a funny engagement with my property manager about the CPI increase because he was fearful that the tenants would leave and provided me some poor examples of properties which were vacant for a period of time. Anyway, I advised him that as part of the due diligence check, the tenant's business went up by 20% during COVID and the current rent was not heads and shoulders above the market. Of course, I may consider no rental increases close to the end of the lease agreement for them to take up the option and sign a longer contract.

 

No, they don't. They're "set and forget" style, like a home loan.