The Reserve Bank has executed its first interest rate cut since November 2020, a move that its already generating optimism among experts who emphasise its potential positive effects on commercial real estate markets.

Chris Nicholl, CEO of Raine & Horne, believes the RBA’s decision will underpin consumer and business confidence, leading to a stronger housing market performance and subsequently higher rents and values across retail, industrial, and office sectors.

“The monetary policy shift by the central bank also offers an opportunity for investors and business owners to reassess how their financing arrangements could be boosted in the current market environment,” Chris added.

That said, not all commercial property finance is priced directly off the RBA’s cash rate target.

Craig Betalli, Senior Broker at financial specialist Our Broker, explains that repayments for commercial property loans are priced based on the loan’s value.

“For loans under $3 million, lenders typically offer simpler variable-rate loans that fluctuate in line with the RBA’s interest rate adjustments,” he said.

“However, for sophisticated borrowers with loans over $3 million, the loan interest rate is generally tied to the more complex Bank Bill Swap Bid Rate (BBSY), which anticipates future moves by the RBA.”

To illustrate, starting in January, there was increasing speculation that interest rates would fall when the RBA met in February. As a result, banks began to factor in expected rate cuts into the 90-day Bank Bill rates.

According to data from Our Broker, after the RBA’s official cash rate reduction to 4.1% on 18 February, the BBSY settled at 4.19% two days later. In comparison, the BBSY was at 4.25% the week before the rate cut and stood at 4.34% at the beginning of February. Going back to 24 December 2024, it was 4.48%, a level reflecting the RBA’s more hawkish stance on a rate cut at the time.

How the BBSY affects commercial property and business loans

The BBSY is a key interest rate benchmark Australian banks use to price short-term loans and financial products. It represents the rate at which banks lend to each other for short periods, typically 30 to 90 days.

While the RBA’s cash rate influences the BBSY, it also reflects broader market conditions, including liquidity and credit risk. The BBSY is published daily and is the reference rate for many commercial financing products, including business and commercial property loans.

What the BBSY means for commercial property investors

According to Craig, the reduction in the BBSY signifies a drop in the cost of financing for commercial property investors whose loans are tied to this benchmark.  

“If rates continue to fall, investors may find their borrowing costs ease, but this will largely depend on the size of the loan and its structure,” he said.

The interest rate is usually calculated by adding a margin to a base rate when securing a loan. For instance, if the base rate (BBSY) is 4.19% and the lender adds a margin 2% to 2.5%, the interest rate for the commercial property loan would be 6.79% depending on the lending.

For investors with loans over $3 million, the ongoing reduction in the BBSY presents an opportunity to benefit from lower financing costs as the market adjusts to the RBA’s rate cuts, Craig explained.

“Commercial property investors should stay informed about these trends and consult with experts such as Our Broker to ensure they are optimising their financing arrangements, particularly if they have significant exposure to the 90-day BBSY rate.

“Understanding how the BBSY impacts loan repayments is critical for making informed investment decisions now we have entered a new interest rate cycle.”

Craig added, “If you’re not satisfied with your current lender, a finance specialist such as Our Broker can help you look around for the most suitable financing for your current or future commercial property investments.”

For all your commercial sales and leasing needs, contact your local Raine & Horne Commercial offices. For advice on financing a commercial property purchase, contact Our Broker at 1800 913 677.