What the RBA rate decision means for the commercial property sector

The move to drop the cash rate by 25 basis points to 3.85 per cent was made at the first RBA meeting since the federal election, with underlying inflation now lying within the acceptable range of 2-3 per cent.

The move, announced by RBA governor Michele Bullock at 2.30pm, is set to lift sentiment across the commercial real estate sector and bring relief from the cost-of-living crisis, according to commercial real estate insiders.

The RBA held the official cash rate at 4.1 per cent at its last meeting in April, following a long-awaited cut in February of 25 basis points from a high of 4.35 per cent that was held for around four years.

Underlying inflation dipped below 3 per cent for the first time in three years to 2.9 per cent in March from 3.3 per cent in December, and now sits steady at 2.4 per cent – the first time it’s hit the ideal range since December 2021.

What does the rate cut mean?

Ben Armstrong, the managing director of Queensland-based Bromley Real Estate, says the rate cut will have a positive effect on all sectors of commercial real estate, and boost consumer confidence and economic growth across Australia’s capital cities.

He says it will benefit all sectors – from industrial, office and retail – and will likely lower capitalisation rates.

“The rate drop amplifies consumer confidence, and when there’s consumer confidence, people buy,” he says. “They start releasing purse strings and get more dollars working through the economy, which is what everyone wants.”

Armstrong says the RBA has a “juggling act” to ensure “it’s measured growth and it’s not out-of-control growth”.

“All of those markets are now settling down,” he says. “It feels like we’re back on track with a steadying marketplace and steadying supply channels.”

As for capitalisation rates and yields, Armstrong says cap rates have been tightening for some time.

“In the last 12 to 18 months, they’ve just started to go out,” he says. “But certainly that has a direct effect on yield. If you’re paying 6 per cent on interest rates, and suddenly you’re paying 5 per cent … it has a reflection. Normally, it means a tightening of capitalisation rates and yields.

“The lower interest rate environment means that cash sitting in the bank is not earning as much for people. And they’ll look at that and say, ‘Well, yes, it’s most risk-averse to have cash in the bank.’

“So they’ll look at that and they’ll say, ‘Right, maybe I need to get my cash out of the bank and into the market.’ So that will get invested into alternative investments, whether it be stock markets or property, and it can influence people to pull the cash out of the bank, and put it into markets.”

Armstrong expects the banks to pass on the cut to their borrowers “pretty quickly”.

“I’d be surprised if they don’t pass it on,” he adds.

The cash rate is the interest rate set by the RBA, which determines how much commercial banks add onto customers’ loans for the privilege of borrowing cash.

When the cash rate target changes, it’s up to each bank to decide if and when they pass on the discount.

A boost to the economy

Knight Frank chief economist Ben Burston agrees the rate cut will boost the economy, bringing hope of yield drops.

“The second interest rate cut reaffirms the trend toward lower interest rates and will add impetus to the nascent recovery in property markets nationally, increasing the prospects of yield compression in coming quarters,” he says.

“The cut illustrates that the RBA has shifted the focus of policy to supporting growth, which has become more important since their last meeting in early April, given downside risks to the global outlook.

“While the trade war brings forward new risks, the good news for property is that with the devaluation cycle now ending, the bad news has largely already been priced in, so markets are insulated from further downside risk, with uncertainty now more concentrated on the timing and speed of recovery.”

Further cuts expected

Meanwhile, George Cupac, head of capital at COI Capital Management, says he expects further cuts.

“We anticipate further rate cuts beyond current market pricing, underpinned by moderating inflation and a softening labour market,” he says.

“So long as macroeconomic stability is maintained, we expect the RBA to continue with measured easing.”

Further cuts will positively affect property and private credit markets, Cupac adds.

“Continued easing by the RBA will likely result in asset value uplift and modest cap rate compression, creating tailwinds for commercial real estate debt strategies,” he says.

“Private credit markets, particularly floating-rate facilities, will benefit from enhanced relative returns in a declining rate environment.