Rising Interest Rates....is your Portfolio Ready?
Since the GFC we’ve had historical low interest rates which has been necessary to try and kick start the economy. But the big hidden risk is what happens when they rise? What does your property portfolio look like and is it robust enough to withstand the coming rate rises?
I started work in the mid 1980’s for ANZ Bank, at a time when interest rates reached 18% for home loans, 21% for commercial loans, and I was getting 13% on my passbook savings account! In a training session one day, we were shown a film from the 1950’s advertising savings rates at 5% and we all thought that was hilarious and it would never happen again. Well, here we are.
The big problem will come when interest rates begin to rise. It’s critical that your property portfolio is geared to withstand rate rises and that your cash flow from your assets can weather the coming storm.
If you’re geared well and you can rely on cash flow from your property assets to service your property debt, then you are well placed. The question is how risk adverse should you be? Should you allow for a 1% rise? Should it be a 5% rise? A lot of this comes down to individual assets. Are they well located? Do they have national tenants with good WALE? Are they non-repeatable? All these questions and many more determine how cautious you should be.
There are two major pitfalls to avoid –
1. With higher interest rates will come higher inflation and higher capital growth of your property assets. This will allow you to refinance and increase available funds to service debt. STOP…Don’t service increased interest costs via capital growth funding. Capital Growth funding is for new investment.
2. The cash flow utilised to service your property debt should be contained to that property or property portfolio. As soon as debt funding requirements exceed the ability of the property to service that debt, it’s time to rethink that asset…don’t hide that assets’ performance by funding it from better performing assets.
John Rosel