King & Co Property Consultants believes the RBA statement on the economy may be a positive signal to investors but laments interest rates being left on hold!

by admin | 14th November 2012

The statement released by RBA Governor Glenn Stevens on 6 November provides valuable insight into its thoughts.  Most significantly, he correctly observes that interests rates ‘have declined to be clearly below their medium-term averages and savers are facing increased incentives to look for assets with higher returns’.  This is encouraging and suggests to investors that it is OK to invest!!

It is a shame, then, that the RBA did not endorse this statement with a 0.25% rate reduction…. perhaps a lost opportunity.

Recent media suggest banks have already increased their interest in commercial property, with the big four reported to have increased their exposure by approximately $3.0b in the past six months. This is a clear sign that the banking industry’s confidence in this sector may be returning.

A further positive is that A-REITs have been reported to have achieved more than three times the returns of the broader share market this year, which serves to demonstrate the potential of investment in non-residential real estate.

It is interesting to note that the 10 year Australian Government bond rate trend since July 2012 suggests that interest rates are moving ‘north’, having bottomed in July.

Significantly, the prevailing yields on good quality industrial investment property are in the vicinity of between 7.5% and 8.0%, ….. a massive margin of 4.75% over and above the current cash rate of 3.25%. In our view this margin more than compensates for the risk.  Right now industrial real estate offers prudent investors returns and security well in excess of cash and shares.

Short supply of ‘A’ grade industrial space ultimately means higher rental rates and firming of prices.  If rates have bottomed now may well be the time for investors to take a positive attitude towards risk and move into the industrial property market.  Conversely, those owners looking to adjust their holdings could take advantage of an increasing appetite for risk by investors and put their property on the market.

Intending owner-occupiers should also take note – the current interest rate regime, combined with increasing rental rates, means it may be cost effective to buy property rather than lease it.  This opportunity cannot be expected to last for long.

Wayne J Robson
General Manager
(07) 3844 3222

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