The National Australia Bank has released data showing rising interest rates will likely hold back the commercial property market well into 2023.
The NAB Commercial Property Index has revealed property professionals are finding it harder to obtain debt or equity and are expecting it to get worse over the next 12 months.
The statistics from the report show the number of commercial developers planning to start new works in the next six months has fallen to a three-month low.
Dragging down the index were big shifts down in office and retail sentiment, while industrial property sentiment stayed solid.
Victoria and Western Australia were the worst two states for office property confidence when looking forward over the next couple of years, while industrial capital growth is expected to outperform the other sectors over that time.
Commercial property deals nationally for the second quarter fell by around a third to $14 billion year-on-year, putting an end to three record quarters.
Transactions so far this year have totalled $28.8 billion, which is a drop of over 10 per cent from the previous year.
Benjamin Martin-Henry is from MSCI Real Assets, who provided the figures, and spoke to Australian Financial Review.
“After such a strong 2021, volumes were likely to normalise in 2022, but the recent economic issues have further impeded activity, particularly at the smaller end of the deal spectrum,” he said.
“Smaller investors are more sensitive to increases in the cost of capital so the recent interest rate rises may have curbed deal flow.”
Fellow MSCI colleague, head of real assets research David Green-Morgan, told AFR the retail property sector has been patchy this year.
“Pockets of the retail sector have seen some robust demand, but deal activity across the sector has dropped 28 per cent in the first half of the year,” he said.
“Overseas investors have leaned much more to the office and industrial markets.”
There’s little doubt it’s the rising interest rates that are putting the brakes on commercial property, increasing the costs for investors and reducing their borrowing ability.
The rate rises tend to affect smaller investors more because they have less choice when it comes to sourcing capital compared to the larger institutions, but those larger institutions will still be feeling some pain regardless.