New Zealand commercial interest rates: where are they headed in 2018?

The commercial property market is influenced by countless factors including the rate of economic activity, property prices, rental growth, risk of vacancy, and more. However, the one facet that influences the market significantly is interest rates. 

From an investors point of view, the cost of borrowing money to buy has a clear and direct affect on a commercial property's yield and its long term returns. From a business owner's point of view, higher interest rates make business growth more difficult, and can result in decreased demand for new commercial leases (which of course affects investors). 

With that in mind, knowing where New Zealand commercial interest rates are headed is of importance in the long term planning of any commercial property investor or owner/occupier.

Where are commercial interest rates headed in New Zealand in 2018?

Official Cash Rate at a record low

The Official Cash Rate (OCR) is one of the key determinants of the cost of borrowing to buy commercial property and it's been at a record low of 1.75% since November 10, 2016. This has decreased the cost of lending for banks, resulting in lower commercial interest rates. 

The market has seen the effects of this with the low cost of lending driving high levels of sales, and low vacancy rates. As a result of high demand, commercial property prices have increased. In fact, realestate.co.nz data shows that the average price of all classes of commercial property increased by $69,061 from late 2016 through to the end of 2017. 

So, where are interest rates headed in future?

Major bank's forecasting increases

The Reserve Bank has stayed mum on the future of the OCR in recent media releases. However, their oft-repeated statement that monetary policy will remain accommodative for a considerable time suggests that rate rises are unlikely during 2018. 

Major banks, are more clear in their expectations. The expert consensus from their economists and the financial markets alike is that the Reserve Bank will increase the OCR during 2019, possibly as soon as February. This is expected to come as a reaction to long-awaited increases in inflation.

While other factors influence the cost of commercial borrowing, the OCR is the clearest indicator available. With that in mind, it's likely that the cost of borrowing for commercial property buyers will start to increase at some point during 2019.

The cost of borrowing to buy commercial property is likely to increase in 2019.

Managing your risk as a borrower

Unless you're the Adrian Orr (Governor of the Reserve Bank) there's not much you can do to influence commercial interest rates. However, because of the way that banks lend on commercial property there is a way that you can help reduce your costs of borrowing. 

Most banks calculate commercial interest rates on a case by case basis, considering two factors:

1. The actual cost of lending the borrower the money. 
2. The repayment risk that the borrower presents. 

When dealing with higher risk borrowers banks increase their rates, to widen their margins and reduce their exposure if the borrower defaults. That means reducing your risk profile as an investor could help you save money on interest, particularly over 2019 when rates start to rise.

This can be done by decreasing your leverage, focusing on lower risk commercial investments and increasing your income. It’s also worth adding a point or two onto your calculations so you don’t get caught out if interest rates do increase.

If you're ready to evaluate your property portfolio to safeguard against interest rate rises, start your search on realestate.co.nz - New Zealand’s number one property website, with the most online commercial property listings.