Australia central bank warns of business failures as property vacancies rise

Sydney

BUSINESS failures in Australia are likely to rise, with commercial property seen among the hardest hit sectors as a shift to work-from-home arrangements empties offices and major retail precincts, the country's central bank said on Friday.

The Reserve Bank of Australia (RBA) said the outlook for commercial property means banks' impairment rates will likely climb from current low levels, while some indebted landlords will find it difficult to meet their debt repayments.

Risks appear highest for retail commercial property, the RBA noted, while adding there was still a high degree of uncertainty about the magnitude and timing of business failures in the country.

Over the first six months of 2020, the Australian economy contracted by over 7 per cent under the weight of strict mobility restrictions to suppress Covid-19.

The unemployment rate has since risen from around 5 per cent pre-Covid to nearly 7 per cent, with economists predicting it would jump to 10 per cent in coming months.

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At the same time, a high volume of new office buildings are due for completion in Sydney and Melbourne this year.

Given the deterioration in rental conditions already underway, office and retail property prices could fall sharply, it added.

Investors could substantially re-evaluate risks and pull back demand, which had contributed to strong office price growth over the past decade.

The RBA noted that banks' direct exposures to commercial property as a share of assets was small at just 6 per cent. REUTERS