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Non-Residential Property Nearing the top of the cycle

November 15, 2017

In a low-interest rate environment, it is tempting to gear up non-residential property to generate higher returns on equity. Yet, we believe now is not the time to be pushing leverage (gearing) levels too high. As the RBA quite rightly points out, if there is a “marked increase in global long-term interest rates, highly leveraged investors close to the maximum LVR covenants on bank debt could become vulnerable to breaching loan covenants.” In such an environment, highly leveraged investors face two choices, either provide additional equity to reduce the LVR below the maximum covenant or secondly, sell the asset, which may not be desirable if there are other forced sellers in the market. As we approach the end of 2017 and almost 10 years since the GFC, it is timely that the RBA sends a warning shot across the bow. No one has a perfect crystal ball of what lies ahead, but it’s a timely reminder for market participants to pause and take stock of where we are in the cycle.

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Strutt & Parker

Strutt & Parker’s residential, rural, development and planning teams will continue to operate under the Strutt & Parker brand, whilst the commercial arm of the business will operate under the BNP Paribas Real Estate brand.

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Non-Residential Property Nearing the top of the cycle