Bond yields spike as a rate rise looks locked in

The week's real story played out in the bond market, where Australia's 10-year yield jumped to 5.38%¹ on Thursday as traders all but locked in a Reserve Bank rate rise at Tuesday's meeting, with pricing now sitting at a 92-94% probability of a quarter-point hike to 4.60%² — the highest odds attached to any RBA meeting this year. The trigger was Assistant Governor Sarah Hunter warning that inflation had been "too high for too long"² and risked becoming entrenched, a line that did more to move markets than any single data print. Set against our own reading of a 4.35% cash rate and a 5.01% 10-year bond as of mid-September, this week's move widens the gap that valuers use to discount future rent, and it comes with the extra credit cost for borrowers, the BBB spread, still a contained 1.03 percentage points — debt is getting dearer because of the base rate, not because lenders are spooked by property risk.

Deal-makers pressed on regardless. In Sydney, Wentworth Capital, Mulpha Australia and Hong Kong's Sun Hung Kai & Co settled their $390 million purchase of the Novotel and ibis Darling Harbour hotels³, the largest Sydney hotel trade in four years, struck on a 6% yield with the 781-room complex running at 88% occupancy³. Nationally the numbers back up the resilience: commercial property sales reached $48.4 billion in the year to August⁴, up 6%, with offshore capital surging to $16.3 billion⁴, much of it the $6.2 billion GIC-Brookfield swoop on National Self Storage⁴. NSW remains the engine room at $18.6 billion of trades⁴, but Queensland is the mover, up 39% to $10.8 billion⁴ and now ahead of Victoria.

Against that backdrop, industrial still screens as the cheapest and most resilient sector on our numbers — a 5.40% cap rate against a 6.04% fair-value estimate, an 8.3% projected five-year return and the smallest worst-case drawdown at -12% — while retail sits at the pricier end of the ladder despite a solid 6.4% forecast return. With the whole market cap rate at 5.55% still below our 6.66% fair-value benchmark, further repricing stays the base case if yields keep climbing, which puts Tuesday's RBA decision and Wednesday's inflation print squarely in focus.

In plain terms: right now the model likes Industrial best on value, and is most wary of Retail. Looking five years out, it expects Industrial to earn the most — about 8.3% a year — while Retail trails at roughly 6.4%. Why are property values under pressure? Because the ten-year government bond now pays around 5.0%. When something as safe as government debt pays that much, a building has to offer more to tempt a buyer — and that quietly drags values down. What's holding them up is the steady wave of overseas money still buying in — the one signal we've actually proven moves prices. The table below is that same picture, in numbers.

The numbers, by sector

A quick guide: "cap rate" is the yearly rent as a share of the price — like an interest rate on a building; a higher number means cheaper. "Fair value" is what our model says that rate should be given today's interest rates. "Worst case" is a bad-but-realistic five-year fall in value.

Cheapest to priciest, the order runs Industrial then Alternatives then Office then All Property then Retail. We hunt for value, not hype — the best long-run buys tend to be where the crowd has already sold off.

Independent research — we don't develop, invest in or broker property, and every figure is built from public data. How it's built →