Higher Interest Rates Boost CRE Credit for Qualitas Investors


9 February 2023, Melbourne – interest rate rises, and Australia’s ongoing housing supply shortage will continue to benefit commercial real estate (CRE) credit investors in 2023, according to Qualitas.

The alternative real estate investment manager said increases in official base rates can directly result in higher returns to CRE investors, provided margins remain stable.

At the same time significant unmet demand for residential property will likely offset the impact of rising interest rates on residential property valuations, providing a further tailwind for sustainable growth in the CRE sector.

Qualitas’ Head of Income Credit, Mark Power said the manager is critically evaluating loans every four to six weeks but is not seeing any significant shift in its loan risk profile.

“The market is expecting interest rates to continue to increase in the first half of this year, and we are looking at all loans with a laser focus,” said Mr Power.

“In this environment, we remain vigilant in assessing risks and are frequently repricing our loans given the short tenor of circa 12 months and converting existing fixed loans to variable loans so that increases to the interest rate are passed onto investors through higher distributions.”

Mr Power said CRE investors were also benefiting from the increasing credit spread over the past six months which are expected to widen further over the ahead year.

Supply ‘crises’

Mr Power said a massive dislocation in the market is emerging with estimates that approximately 50,000 new high-density apartments will be required across Australia’s major capital cities every year over the next three years but forecasts pointing to construction of only 19,000 apartments annually in the same period and delivery of apartment stock reaching a 16-year low by FY25.

“Vacancy rates across the country are at all-time lows, with the national vacancy falling to 0.8% as at January 2023,” said Mr Power. “A vacancy rate of 3% is considered as a market in equilibrium and having such a low vacancy rate is indicative of the high rental demand and the very limited housing supply across the country.”

Mr Power said property developers are beginning to position to meet this unprecedented shortfall.

“We see significant opportunity to assist developers to acquire new sites or provide capital to them so they have greater liquidity to meet pre-development costs.”

“So, while there is negative noise currently in relation to the residential property market, we see the residential apartment market as being quite resilient in the next 12 months, following which capital growth is expected to resume in 2024 as the increase in interest rates is absorbed and the impacts of the housing supply crisis become apparent.” said Mr Power.

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