While a looming interest rate hike (speculated to be around 75 basis points) will be felt by sectors around the country, one of the sectors that will be most affected is undoubtedly commercial real estate, which has fought hard to regain momentum in recent years. 

John Jack, CEO of Galetti Corporate Real Estate notes that this will have a compounding effect on landlords, many of whom are still battling high vacancy rates. “As interest rates rise, so do repayments,” he comments. “Commercial buildings are typically quite highly geared in private portfolios which doesn’t leave much room for hiking especially in the face of higher vacancies post-COVID-19,”

September 2022 marks the fifth-rate hike for the year, with one more expected to follow in November. “With that being said, there was significant reprieve over the COVID-19 period with interest rates dropping to a record low, so this could merely be seen as a return to the mean.”

Pressure on REITs 

Real Estate Investment Trusts (REITs) continue to feel the pressure post-COVID-19. “REITS need to maintain conservative debt levels to remain attractive to investors. A REIT’s debt levels should not exceed 40%, in contrast to a private owner where debt levels can often reach up to 70%,” “This in effect shields the REITS somewhat from interest rate hikes but it does dampen the market in terms of investment opportunities”

During COVID-10 however, gearing levels shot up considerably – both as a result of re-evaluations and increased vacancies, requiring higher levels of borrowing and increased LTV ratios.

What GrowthPoint’s Latest Results Mean for the Industry at Large

On the other hand, listed property giant Growthpoint has shown strong signs of recovery and it remains to be seen how another interest rate hike will affect its performance. “Reports from GrowthPoint’s financial year end highlight an increase in its dividend share by a notable 8.4% and a 2.5% increase in its annual payout ratio. In addition, group vacancies decreased by 8.5%.”

Jack believes that Growthpoint has a high quality portfolio which means less vacancy this puts GrowthPoint in a favourable position for further investment and shows clear signs of the industry’s slow, yet steady, recovery. “Despite economic uncertainty, rising interest rates and inflation, there are signs of positive growth as many employers and employees officially return to the office.”

Shop Around for Competitive Offers When Structuring your Debt

“Depending on the structure of the business, an opportunity exists for the landlord to restructure their debt profile,” explains Jack. “This allows you to become more ‘tax efficient’ and to stabilise the funding of your portfolio.”

Jack concludes by saying that it’s important to consider all the financing options on offer and to be advised accordingly. “Quite often, clients will approach their bank and settle for the best offer on the table. However, we strongly advise that you work through an advisor to raise debt at the most competitive rate on the market.”