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Margin calls loom as real estate values cool
Commercial property investors could be forced to sell otherwise profitable properties as falling valuations trigger margin calls, with lenders demanding additional cash or security to maintain agreed loan-to-value ratios.
Commercial property investors are being warned that falling valuations could trigger margin calls from lenders, leaving borrowers scrambling to find additional cash or risk losing their properties, even if they have never missed a repayment.
Property investment expert Victor Kumar warned that unlike residential mortgages, commercial loans typically carry loan-to-value ratio (LVR) limits that lenders can reassess throughout the loan term.
If a property’s value falls below the level required to maintain its agreed LVR, lenders can demand borrowers reduce their debt or provide additional security.
Kumar said the consequences could be severe for highly leveraged investors, particularly those without sufficient cash reserves to meet unexpected demands.
However, with demand for real estate stagnating, some investors may find themselves selling at the wrong time.
“A property can be positive cash flow, fully leased, with the rent paid on time, and still breach its LVR covenant because the valuer says it’s worth less,” Kumar said.
“If you can’t pay the loan down or offer other security, selling becomes the remedy, and usually at the worst point in the cycle.”
He warned that commercial loans were generally structured over one to five years, with annual reviews that could expose investors to unexpected lending demands.
Which commercial properties are most at risk?
Kumar said neighbourhood retail properties, secondary office buildings and single-tenant assets with short leases were particularly vulnerable to falling valuations.
He explained that commercial property values were closely tied to rental income, meaning vacancies, reduced rents or financially distressed tenants could quickly undermine an asset’s valuation.
“Commercial property is valued on its income, so anything that puts the rent at risk puts the valuation at risk,” he said.
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“When unemployment rises, small-business tenants feel it first.”
However, Kumar warned that even commercial properties with strong tenants and stable rental income were not immune to margin calls.
“Even well-leased industrial or medical assets can be revalued down with no change to the rent at all,” he said.
“If you’re highly geared on top of that, you have no room to absorb it.”
Investors warned against chasing yields
Kumar said investors moving from residential into commercial property were often attracted by higher rental yields without fully understanding the additional risks.
“Commercial isn’t simply the next rung on the ladder after residential, and the yield is the price you’re paid for carrying risk,” he said.
He warned that some investors were entering commercial property with barely enough capital to cover their deposits and acquisition costs, leaving them exposed to unexpected lender demands.
“They budget for the purchase but not for vacancy, incentives, capital works or a lender changing its mind halfway through the loan,” Kumar said.
He urged investors to borrow below their maximum LVR, maintain cash reserves, and establish an exit strategy before financial pressures emerged.
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