RBA alert to fallout from poor rent yields
THE Reserve Bank is concerned low yields could make the commercial property market vulnerable to an exodus of foreign buyers or a rise in interest rates in other countries.
Yields on Australian commercial property are higher than in many markets around the world and that has attracted the attention of foreign investors, especially in Sydney and Melbourne, the RBA said in its half-yearly Financial Stability Review yesterday.
The lift in demand from investors has pushed prices higher, relative to rents, meaning rental yields have fallen, most noticeably in the office and industrial property markets.
“One concern is that the current low level of yields could prove unsustainable, particularly if global interest rates were to increase or demand from foreign buyers were to decline,” the RBA said.
If either of those risks materialised and weighed on property values, it could cause borrowers to breach loan-tovaluation covenants – conditions requiring the amount owed be kept below a percentage of the property’s value.
They would be required by banks to come up with extra cash to support their loans.
“A decline in valuations would therefore be more likely to affect highly-leveraged investors, who are usually closer to their covenant thresholds,” the RBA said.
Another risk stems from weakness in leasing conditions in the Brisbane and Perth office markets.
The weakness in rents could hamper the ability of borrowers to service their debts, the RBA said.
The RBA said the banking regulator, the Australian Prudential Regulation Authority, had begun a review of lending practices in these areas aimed at improving standards.