Cuts in interest rates could make property investment more attractive to investors, according to commercial real estate firm Cushman & Wakefield: BROLL.
The firm said that from this month, several central banks are expected to cut interest rates.
US Federal Reserve Chair Jerome Powell was the latest to support the start of interest rate cuts, telling a group of economists and policymakers that “the time has come for policy to adjust”.
A cut in interest rates will depend on the US consumer inflation rate reaching the central bank’s target of 2% as well as the state of the labour market.
According to Cushman & Wakefield: BROLL, the South African Reserve Bank (Sarb) will be watching the US central bank closely as it appears that SA’s central bank has been waiting for the US central bank to start cutting interest rates before starting its own interest rate cuts.
Several economic developments have paved the way for the Sarb to prepare for an interest rate cut in September including consumer inflation easing from 5.1% in June to 4.6% in July as well as the decline in food and transport price inflation.
Cushman & Wakefield: BROLL said that these factors have pushed several economists to forecast an interest rate cut of 25 basis points at the September 19 2024 MPC meeting while three more cuts of 25 basis points each are expected by mid-next year.
Calvin Crick, Managing Director for Transaction Services, Cushman & Wakefield: BROLL said that long-awaited interest rate cut will transform the commercial property sector.
Lower interest rates will have an impact on financing solutions for property purchases, valuations, and profits that investors can generate.
Crick said that a direct benefit that property owners and investors will notice is lower borrowing costs.
This will make it cheaper for investors to finance property purchases which will increase the demand for commercial properties.
As more investors purchase properties in a low-interest rate environment, the overall commercial property market will be stimulated.
“With cheaper financing options, there may be an uptick in property transactions and development projects which will, in turn, boost South Africa’s economy,” Crick said.
Investors will also get more value from their property assets as low interest rates normally lead to higher property values.
“This is because a discount rate that involves lower interest rates, which is used to value future cash flows generated by property rental streams decreases, results in higher present values,” Crick said.
Crick said that this also lead to overall profitability as property investors will enjoy reduced debt repayments because of lower interest rates. Once subtracting property costs from their rental income, investors could generate higher returns.
“This results in commercial properties becoming more attractive investments,” Crick said.
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