CRE credit investors can benefit from rate rises

Oksana Patron

10 February 2023

Although a nine-straight interest rate rise announced earlier this week by the Reserve Bank of Australia (RBA), has created a lot of headaches for mortgage holders, the increase can bodes well for commercial real estate (CRE) credit investors, according to alternative real estate manager Qualitas.

According to the firm, the increases in official base rates would be expected to directly result in higher returns to CRE investors, provided margins remained stable, while the unmet demand for residential property will offset the impact of rises on residential valuations.

The manager, who has continued to monitor and evaluate current loans, said it had not seen any significant shift in its loan risk profile and remained positive on the future of the residential market in high-density areas.

“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,” Qualitas head of income credit, Mark Power, said.

According to him, CRE investors were benefiting from the increasing credit spread over the past six months which were expected to widen further over the ahead year.

Speaking on the residential market, Power stressed that Australia’s capital cities would need approximately 50,000 new high-density apartments every year over the next three years while current constructions forecasts were pointing to only 19,000 apartments were being built on the annual basis, reaching a 16-year low by 2025 in delivery of apartment stock.

Qualitas also sees opportunities in assisting developers who are repositioning to meet the shortfall and would need to acquire sites by providing them with greater liquidity in capital.

“So, 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,” Power added.