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Investing in commercial real estate during high interest rate environments

October 17, 2023
Categories: Commercial, Investments, Market Indicators

While term deposits, bonds and shares have their place, commercial real estate, particularly through property syndicates, can often emerge as a wise investment option for Australians wanting their money to still work for them when interest rates are high.

Investing wisely during times of high interest rates is a priority for many Australian investors looking to stay on the road to secure, solid wealth. But that can be tough to do, seeing as most of us have mortgages, credit cards and even loans against whatever we have sitting in the garage. Interest repayments go up, while our cash flow remains the same. That said, it doesn’t need to be like that, if you invest wisely. 

Commercial real estate can be a wise choice for yield-hungry investors, especially while interest rates skyrocket. Today, we’ll show why, and also draw comparisons between a few investment options you might make while the RBA keeps making our heads tilt upwards. 

High interest rates: A primer for reconsidering your investment portfolio

High interest rates are typically a product of the economic environment, reflecting the cost of borrowing money and providing attractive returns to savers and some investors.  

During high interest rate environments, which can often stretch for years, choosing the right investment becomes crucial to maximise gains. Think about it: your cash flow is not only dictated by your earnings potential or investment performance. It’s eroded by the borrowing costs that climb higher during a high interest rate period. 

Currently, in Australia, inflation is to blame for the RBA’s decisions to hike rates. Thankfully, their consecutive stretch of rate rises appears to have slowed down (as of this writing). 

Want your capital to stretch further for your family, then take a look at where you might invest when interest rates are high. 

Where you might invest when interest rates are high:

Term Deposits: Safe but low-yield

Term deposits are a traditional choice for conservative investors who prioritise safety and predictability. They offer a fixed interest rate over a set term, ensuring your principal is protected. But during high interest rate periods, the interest rates on term deposits may not keep pace with the broader market, meaning your returns can be subpar.

Bonds: Moderate risk, moderate returns

Bonds are another common choice for investors, offering a balance between safety and returns. But, much like interest rates themselves, bond yields are influenced by market dynamics. High interest rates can affect bond prices negatively, leading to lower yields and potentially less appealing returns for investors.

Shares: High potential with volatility

Investing in shares can provide great returns for investors receiving the right advice or who’ve been around the track enough times to know what will make their money grow best. The ability to buy into a well-performing company, with an outstanding track record, is where many investors find comfort.  

But we’ve said this many times before: share investing carries higher volatility and risk. Your shares might require active management, and you’ll likely want comfort that your advisor can skilfully navigate market fluctuations. 

That’s not all. In a high interest rate environment, the companies you’re investing in will most likely carry debt themselves, meaning the returns they provide to you could be further eroded while interest rates remain high. 

Commercial real estate syndicates: The high-yield advantage

Commercial real estate, specifically through property syndicates, often emerges as a wise choice during high interest rate periods. 

Here’s why:

1. High yields

Property syndicates focus on income-generating commercial properties. These investments typically offer attractive rental yields, making them an excellent option when interest rates are high.

It’s the primary reason most investors partake, because the higher income can offset the higher repayments that high-interest rate environments create. 

How much can you expect to earn from a high-quality commercial real estate investment? We answer that here: What is a good return on commercial real estate?

2. Reduce loan-to-value ratio

In Australia, the typical maximum loan amount a residential property investor can secure for their asset is 80 per cent of their property value. The maximum amount a commercial property investor can secure is usually only 60 per cent. 

Yes, investors will need to provide additional capital to secure a commercial property over a residential one. But that equity is now working for them. The yield on that additional 20 per cent won’t be impacted by interest rates, but only by the property value. And one look at the history of Australia’s real estate market proves that real estate in this country tends to – in the long-run – go one way only: north.  

3. Professional management 

Property syndicates are managed by experienced professionals who actively search for high-yielding properties, conduct thorough and lengthy investigations into the right asset, create a strategy on how the most substantial value can be squeezed from the investment – and then pass the returns on to you.

It’s a hands-off investment, and sitting at the wheel are highly-qualified professionals with exceptional track records. 

The important thing is choosing the right commercial property investment company. Get our take on what to look for in a commercial property syndicator here

4. Diversification

Commercial real estate syndicates pool funds to invest in a diversified portfolio of commercial real estate assets. This diversity can spread risk from your investments and usually enhances the potential for stable, high returns. 

Seeing as commercial real estate is considered an out-of-reach investment for typical Australians, property syndicates – which allow access into the commercial market at a far lower investment amount than if investors went at it alone – opens the doors to many investors who don’t already hold that asset class in their investment arsenal. 

While term deposits, bonds and shares all have their strengths, we find the most confident and comfortable use of our own capital during high-interest rate periods is in high-yielding commercial real estate. You’ve seen the reasons why but – with sound financial advice from your accountant or financial advisor – it’s up to you to make the right investment decision for you. 

Want to know more about how we might help your investment decision? 

Get in touch to learn more about how easy it is to invest alongside us, in high-quality, high-yielding commercial real estate. Our investors are from all corners of the country, but share the same goals when it comes to investing: real, robust and long-lasting wealth. 

Call, email or book an appointment with us today. 

properties and pathways

Properties & Pathways is a dynamic Australian property investment company. Our completed syndicates have provided investors an average annualised return of 21.97%. For more information on how you can invest alongside us, get in touch today.