The decision by the Monetary Policy Committee to increase interest rates may be unfortunate for the commercial property sector.
According to Robin Lockhart-Ross, Head of Risk at Nedbank Corporate Property Finance, this is not so much because of its immediate or absolute impact on the servicing of existing loans or the viability of proposed projects – but rather because of the effect on business confidence in the property sector, especially coming on top of the disappointing retail trade statistics for December.
“The stable and low short-term interest rates we have enjoyed since mid-2012 has enabled the property industry to trade itself out of most of the difficulties encountered during the recession, and to plan forward with some degree of certainty and confidence,” he says.
“In recent months, the long end of the interest rate spectrum has ticked upwards as the market anticipated a rate hike, but only later this year or even only next year. In a sense, the short end has now narrowed that gap earlier than expected, but the comfort taken by the market from the consensus view of “lower for longer” will nevertheless have been shaken a bit,” adds Lockhart-Ross.
The retail sector has been the frontrunner in the property market over the past three years, during which numerous new shopping centres have been developed or commenced – so these two adverse signals read together, and coupled with concern over possible further rate hikes, could well have a dampening effect on the retail property sector.
Following the retail sector has been industrial property, driven mainly by logistics and warehouse, which are closely linked to retail. Lagging behind it has been the office sector, whose turnaround is not going to be advanced by uncertainty over interest rates.
“From Nedbank Corporate Property Finance’s own perspective, the rate increase is not expected to have any material adverse impact, either on our existing loan book or on our pipeline of new deals. Our book is in its healthiest state from a credit perspective since prior to the recession, and we have a stronger pipeline of loans in payout phase on projects in progress than for several years,” he says.
The immediately evident impact of this rate change will be on the prices of listed property stocks, which are inversely correlated to interest rates, and which have already dropped in response to the announcement.
“Looking beyond the commercial sector to residential property, the rate increase could have more of an impact on consumers still trading out of over-indebted positions, and could thus take some of the steam out of the encouraging momentum that was becoming evident in residential market activity and prices in the latter half of 2013,” concludes Lockhart-Ross.