Commercial property continues to entice investors

By Greg Bell

The commercial property has witnessed an upswing in activity over recent months,but what are the reasons behind this emerging trend?

A recent release by ING Direct suggested investors are currently enjoying a host of positive conditions, which are giving them the incentive they need to buy commercial property in Surfers Paradise. Low interest rates, rising property prices and tighter lending conditions for investors have all worked in commercial property's favour.

All-time low cash rate has a positive impact

The Reserve Bank of Australia (RBA) took the historic decision to reduce the official cash rate to two per cent back in May, and it's remained at this level ever since. As a result, borrowers are benefiting from lower lending costs, which could give them the incentive they need to make big-ticket purchases such as commercial property.

There is plenty of debate over if and when the RBA will decide to increase rates further, placing a sense of urgency for anyone who has yet to make an investment. Of course, there is also the possibility of a further rate cut, which will be the more likely option if the economy doesn't gather pace.

Commercial property prices are on the up

There are high expectations for commercial property in 2015, which could persist for many years to come. Forecasts from BIS Shrapnel suggest the property and business services sector has thrived over the past couple of years, while financial and insurance services has also performed well.

As with any property market, the commercial sector has been through a cycle over recent years. For buyers, the challenge is to know exactly when is the right time to buy, as well as having the confidence in the value of commercial property on the Gold Coast picking up pace over the coming years. 

APRA clamps down on investors

Late last year, the Australian Prudential Regulation Authority (APRA) announced plans to tighten restrictions on residential mortgage lending to investors. This may have led buyers to instead shift their focus towards commercial property, where fewer restrictions are imposed.

APRA was particularly keen to stamp out high-risk mortgage lending amid concerns it could be pricing non-investors out the market. APRA chairman Wayne Byres explained while many authorised deposit-taking institutions are carrying out their operations legitimately, there is a minority that is granting excessive numbers of loans to property investors.

These measures already seem to have had an impact, as acknowledged by the RBA in minutes from its 1 September meeting. RBA governor Glenn Stevens highlighted a "notable decline" in lending growth over the course of July, which many members believed was a result of APRA's intervention.

Future demand for commercial property

Although conditions appear to be working in investors' favour for the time being, the future will hinge on whether these conditions are able to continue. It might be unlikely that prices will plummet soon, but if they do, there's every chance this could encourage more investors to buy commercial property on the Gold Coast.

There is also never any certainty over what the next cash rate decision will be. Speculation suggests it could be a while before rates increase, but the RBA board will need to monitor economic data to determine whether this is the right course of action for the stability of the country as a whole.

APRA's guidelines don't appear to be going away any time soon, especially as their impact is already being felt less than 12 months after they were introduced. Whether this will lead to a similar situation in the commercial property market is open to debate, but for the time being at least, investors are making the most of the opportunities available to them.

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