Cheap debt has created an investment climate where investors are making riskier choices than they would otherwise make when the cost of borrowing is higher, according to Australian financiers.
There is not enough demand for office space alone to account for the price increase the market has seen during the past 12 months and low interest rates are responsible for propelling them up, according to fund manager Roger Montgomery.
More sources of funding, including Chinese banks, private investors and private equity groups, are putting pressure on traditional banks to offer lower interest rates on property loans.
Large commercial landlords, such as DEXUS Property Group, are able to borrow money over a five-year term for less than four per cent. Last year it paid five per cent to borrow over the same term.
Developers are able to bring projects to the table where they have a number of pre-lets, which makes them attractive to lenders. Australia’s commercial property is still well-priced, and low interest rates put the market on the radar of international investors.
There have been significant jumps in value on commercial properties recently. Anton Capital sold a North Sydney office tower in January for $157.5 million.
The company had purchased the property one year earlier for $84 million. In Melbourne, DEXUS sold an office tower for $105 million, which was more than double the amount it paid for the property less than 18 months ago.
Many in the industry think that now is the time to make money, since growing property values and cheap debt make for favourable conditions.
Weak fundamentals make the risk high at this time, though, and there are a number of people in the industry who are aware of this divergence.
Timing will be the key for investors interested in the Australian market. It will depend on whether fundamentals return before interest rates start to rise.
The Reserve Bank of Australia stated recently that risks in the area of lending for commercial real estate appear to be building, and that lenders “should be mindful of the collective effects of strong lending activity within particular market segments.”
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