Morgan Stanley Australia Summit: Aggressive interest rates hurting real estate sentiment

Uncertainty unleashed by 12 interest rate rises is affecting the real estate sector but there’s a glimmer of hope, a Sydney summit has heard.

Aggressive interest rate increases by the Reserve Bank to combat inflation at its highest level in three decades has weakened sentiment in real estate sector, industry figures say.

The uncertain outlook unleashed by 12 interest rate rises in the past 14 months has resulted in a lack of appetite for investment in the space and many players are opting to sit on the sideline and wait.

the Reserve bank increased the official cash rate to 4.1 per cent on Tuesday, causing many analysts to upgrade their rate forecasts. Goldman Sachs expects a peak of 4.85 per cent and the Commonwealth Bank 4.35 per cent.

Centuria joint chief executive John McBain. Picture: Hollie Adams

Centuria joint chief executive John McBain told Sydney attendees of the 5th Morgan Stanley Australia Summit on Wednesday that interest rate increases had created a challenging environment and that sooner peak rates were achieved the better it would be.

“We have this trend towards rates not plateauing and I can see a divergence in capital markets continuing while that is the case, Mr McBain said.

“Various events in the past few weeks have only added to the risk and is troubling, along with the state of North American and European markets.”

During a panel called “Higher for Longer – the new paradigm for interest rates and capitalisation rates”, Charter Hall chief executive and managing director David Harrison told the conference that the rate rises had without doubt hit the real estate sector and the rate of return from investments.

Charter Hall Group chief executive David Harrison.

“You can’t have a 4 per cent increase in the cash rate without it having an impact on capitalisation rates,” he said.

“The valuation impact are going to be very different by each sector. Industrials is one that I would expect that we see flat valuations and capitalisation rates will probably blow out.”

Mr Harrison said that while some sectors would see valuations retreat on the back of weaker returns in a difficult market, the outlook was positive for listed real estate groups this reporting season.

“Markets like Sydney CBD have seen very strong rents and we have rents (rise) in the past six to 12 months. Office will probably be one area that will surprise,” he said.

“Overall valuations when everyone starts to report will be better, certainly for offices, than the market is expecting.”

While interest rates and inflation had rocked the real estate sector, resulting in a number of builders going into administration and investment stabilising, Brookfield head of real estate Australia Sophie Fallman said that the outlook in the long term was weighed towards positive.

Brookfield head of real estate Australia Sophie Fallman. Picture: David Geraghty

“We see very good demand for Australian real estate in the long term,” she said.

“Sydney and Melbourne office towers are some of the most sought after in the world and combine that with Australia’s stability and economy, it will underpin strong investment once this period of disruption is over.”

The panel, which also featured Morgan Stanley chairman and co-head of investment banking Tim Church, agreed that there was a significant amount of capital that was on the sidelines waiting to be deployed when interest rates peaked.