Interest rate: What does the latest rate hike mean for property buyers?
Category Newpoint Property
The recent interest rate hikes have left property buyers pondering the potential impact on the market. Interest rate fluctuations have always had a significant effect on the property market. With the latest increase of 50 basis points and the persisting stagnation of the economy, the financial strain on property buyers and owners is growing.
On March 30th, 2023, the South African Reserve Bank unexpectedly increased interest rates by 50 basis points, higher than the expected 25 basis points. After raising the repo rate, the central bank justified its decision by citing elevated inflation and the adverse effects of widespread power outages. Presently, the repo rate stands at 7.75%, while the prime lending rate is at 11.25%.
What does it mean for the industrial property industry?
Since November 2021, when the current cycle began, interest rates have been raised nine times. In total, 425 basis points have been added during this period. Industrial property industry is negatively impacted by rising interest rates as buyers and businesses struggle to find affordable financing.
How the Interest rate might impact industrial property owners and buyers
Buyer affordability has been impacted by the increase in interest rates to 7.75%. With higher interest rates, buyers need help to obtain funding for commercial real estate, including industrial properties. Existing industrial property owners who have borrowed money may have to pay more to service their debt, putting stress on their finances.
When interest rates rise, industrial property owners may see less property demand. As a result, owners may be driven to lower their asking prices to attract possible buyers, resulting in decreased property values. Furthermore, rising borrowing costs may deter buyers of properties.
Despite these difficulties, the South African property market has been reasonably stable this year, with an average growth rate of around 3.5%. Its resiliency shows that moderate interest rate rises may have only a minimal impact on industrial property owners and buyers.
How to deal with the interest rate hike?
You have several options to cope with the rate increase if you own an industrial property or a buyer. Here are some tips:
- Evaluate your financing options
Consider your financing choices in light of the increased interest rates. Refinancing your present loan may be an option, as may be looking into private equity or mezzanine finance. These financing methods can provide access to additional funds and better terms, but both have their fair share of risks.
- Reassess your investment strategy
Rising interest rates may reduce the overall profitability of your industrial property holdings, forcing you to rethink your investment strategy. You could evaluate your investing approach frequently to account for market shifts in demand, rental rates, and property valuations. For example, if there is an increase in demand for leasing properties in a specific location, it can be a good time to invest in it.
- Explore value-add opportunities
Industrial property owners may take advantage of market changes by investing in property improvements. You can increase the property's worth by renovating or finding a new land use. Renovations can be aesthetic, like painting and landscaping, or structural, like constructing a loading dock. These upgrades can increase the property's worth by making it more appealing to potential tenants or buyers.
- Focus on long-term goals
Although the rate increase may cause short-term difficulties, industrial property owners and investors should focus on the big picture. It could involve regularly reviewing your portfolio and adding new assets in other fields. By regularly examining the portfolio, owners and investors can assess the performance of their current assets and uncover chances to add new assets in different industries.
- Focus on operational efficiencies
To offset higher borrowing costs, focus on optimising the operational efficiency of your industrial properties. It may include reducing maintenance and repair costs, implementing energy-efficient practices, or exploring new technology solutions to streamline operations.
The impact of a prime rate hike on property buyers and owners can vary, depending on their financial situation and the type of property in question. It is essential to consult with financial experts to evaluate the implications of interest rate changes on property investments. Get in touch with Newpoint Property Group practitioners today if you have questions about investing in industrial property or would like to see our property listings.
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