Empty offices to pose headache for metro investors

THE Reserve Bank has warned a looming glut of office space in Melbourne and Sydney poses a risk to property developers and investors.

The nation’s central bank has expressed concern that a large amount of new office space due to be completed this year will struggle to find tenants as the coronavirus crisis smashes the economy.

The potential hit was discussed at the RBA’s May board meeting, during which it kept the nation’s cash rate on hold, minutes from that gathering released yesterday show.

“A large amount of new office space was expected to be completed in Sydney and Melbourne in 2020,” the minutes say. “Members noted that demand was not expected to keep pace with stronger supply in the near-term, and therefore it was likely that vacancy rates would rise and office rents would fall. Rising vacancies and reduced rent would be likely to lead to lower valuations, which would pose challenges for leveraged property investors and developers.”

The RBA board appears more comfortable about the risks hovering over the residential property market amid a surge in unemployment, noting about one-third of households with mortgages were more than three years ahead on their scheduled payments.

“A smaller share had no mortgage prepayment buffer and were more susceptible to financial stress,” the minutes say. “Housing loan arrears were likely to increase, but the extent would depend on the severity of the economic contraction and the associated increase in unemployment.”