After the Hayne Royal Commission many advisers decided to steer away from large dealer groups in favour of becoming self-licensed. In the last six months, however, that trend has taken an abrupt turn.
While known for being the flagbearer for financial product providers, the Financial Services Council is now making serious inroads into the financial advice sector.
The ripple effect of rate rises on commercial property
The Reserve Bank decision to push up the cash rate by 25 basis points to 0.35% – the first increase in 11 years – did not surprise Castlerock.
Some analysts thought the RBA might hold off for another month considering we were amid a federal election; others thought the increase might have been higher with former Reserve Bank Governor Bernie Fraser chiming in to suggest a 50-basis point increase was needed. In the event, the RBA settled on 25 basis points, with more increases in the pipeline.
In the commercial property market, the decision was widely anticipated, as is the expectation that more increases to come. Investors know that the historically low 0.01% cash rate always only had one way to go and that was up. The CPI rising 2.1% in the March quarter for an annualised rate of 5.1% guaranteed it.
From Castlerock’s perspective, higher rates are something we have had on our radar and have factored it in. Although acknowledging the historical link between rising interest rates pushing cap rates higher and the potential for asset values to lower, we believe this is not the full story, especially as we expect interest rates to rise in a temped fashion.
The fact is there is a multitude of factors influencing property asset values of which interest rates are just one. It includes the type of property, location, tenant quality, lease duration and the macro-economic outlook – and this list is not exhaustive.
What it does mean, however, is that investors will need to be diligent when deciding to invest in commercial property. They will need to look closely at which property asset type is best suited to their portfolio and what their views are on factors such as lease duration and prevailing economic conditions.
For Castlerock, with more than $650 million in assets under management across two funds, our alignment with government-leased office buildings, often in regional areas, poses some different questions. Post pandemic, will governments (especially state governments) continue to emphasise decentralisation? We believe they will and projects such as the GovHub at Morwell in Victoria’s Latrobe Valley is the way of the future.
We also expect government employees to return to more traditional work patterns as we increasingly learn to live with COVID. Barring the outbreak of a more virulent strain of the virus that sees governments re-impose restrictions, we are optimistic most employees will return to the office environment (in fact, we’re seeing it now), although it will take a year to see how it plays out.
It’s also worth noting that COVID has reinforced the role of government in the economy. This is not only reflected in rising debt levels but in a public mood that expects more activist government, whether it be climate change, industry policy, health, or education. For a property fund manager that is government-centric, this trend augers well.
Although it’s not Castlerock specific, it’s significant that the RBA’s 4 May statement also highlighted the resilience of the economy with the unemployment rate declining over recent months to 4% and labour force participation increasing to a record high. Both job vacancies and job ads are also at high levels. With the obvious caveats about global uncertainty – think COVID, Ukraine, and China – the bank still expects GDP to grow 4.25% in 2022 and 2% in 2023.
This forecast supports our contention that there will be continuing keen demand for quality property assets that will be buoyed by ongoing overseas interest from sovereign wealth funds, insurers, and pension funds due to Australia’s safe haven status for capital. Remember, too, that two decades ago, Australian super funds only had between 3-5% of their assets in commercial property; today that figure is about 10% of a pie that’s well in excess of $2 trillion.
For a property fund manager, higher interest rates are never welcome. But when the cash rate is still only at 0.35% and the increase reflects a growing economy in which commercial property is in demand – locally and from overseas investors – then we believe the signal the RBA is sending to investors with this increase is more positive than negative.
