How Commercial Property Revaluations Are Redefining the Mortgage Fund Outlook

There’s good news to report: the recent resetting of Australian commercial property valuations has quietly redrawn the mortgage fund landscape.

After years of artificially low yields and frothy asset prices, particularly amongst unlisted funds which weren’t regularly revaluing their assets, the structural repricing of office towers, logistics hubs, and retail centres has been gradually filtering into the world of private property lending.

As a result of this shift, returns in parts of the mortgage fund sector are looking more attractive on a risk-adjusted basis...

A Commercial Property Cycle at Play

For much of the post-financial crisis era, commercial property valuations benefited from two powerful forces: record-low interest rates and abundant liquidity.

Cap rates fell as a result. For example, Sydney prime office cap rates compressed from 6.5% in 2009 to below 4% at their low point in 2019, driven by the hunt for yield. Similar dynamics were witnessed in Melbourne, Brisbane and Perth, where logistics and industrial assets, in particular, commanded unprecedented pricing premiums.

During those glory years for commercial property, lenders were often forced to accept slimmer margins and less conservative loan-to-value ratios, since the borrowers enjoyed such a buoyant collateral base.

However, that cycle has been broken in recent years.

Higher global debt costs combined with weaker demand in some commercial sectors has pushed commercial property valuations much lower in recent years.

According to Research from JLL, Australian office values have corrected by as much as 20% from their 2022 peaks, while retail assets in secondary locations have suffered even steeper adjustments.

Cap rates have since risen across the board. For example, Sydney CBD office yields are now closer to 5.25–5.5% and industrial cap rates, which had been priced to perfection, have also risen.

This reset has had important implications for mortgage fund lenders. When valuations fall, loan-to-value ratios increase mechanically, even if absolute debt levels remain unchanged.

So for many lenders, falling commercial property valuations have highlighted risk exposures which may have been hidden during the upswing. It has also forced a repricing of credit spreads to the benefit of new capital coming into commercial property.

Mortgage funds have responded by tightening their underwriting standards, lowering their leverage tolerances and demanding higher returns on new deals.

For example, whereas mezzanine financings for property developers may once have offered a 10–12% yield, more recent transactions have been being priced closer to the mid-teens, reflecting both higher base rates and a larger risk premium. Senior secured loans, meanwhile, that once delivered only modest returns are now yielding upwards of 7–9% depending on the asset class and borrower profile.

It’s noteworthy that the yield on a 10-year Commonwealth bond sits just above 4%, while investment-grade corporate bonds average around 5–6%. In contrast, senior secured loans to property-backed borrowers are sitting well above these levels, despite often being supported by a first-ranking security over tangible assets.

The generous margin of safety embedded in many newer deals reflects not just repriced property valuations, but also lenders’ ability to dictate better terms in a tighter liquidity environment.

The knock-on effect is that investors entering mortgage fund raisings today are often exposed to better contractual returns with stronger collateral backing than prior year funds, a combination that’s likely to lead to solid risk-adjusted returns longer term.

👉 Investor Takeaway: The interplay between property valuations and loan risk is important to understand. Lower valuations can be unsettling at first glance, but they represent a cleansing of market excesses. This is what allows disciplined lenders to step in on more favourable terms.

Mortgage Fund Outlook Influenced by Rates

Looking forward, mortgage fund returns will continue to be shaped by the macroeconomic environment.

If interest rates continue to fall in 2026, commercial property values may continue to rise, lowering risk for existing lenders and potentially boosting equity valuations.

If rates remain higher for longer, however, lenders will retain the upper hand, extracting higher spreads and tighter covenants from borrowers under pressure.

Either way, the recent reset in valuations ensures that mortgage fund investors are entering a market with more rational pricing, greater transparency of risk, and stronger foundations for sustainable returns.

👉 Investor Takeaway: The repricing of commercial property has realigned the relationship between asset values and credit risk, and in doing so has created an opportunity for investors to capture superior risk-adjusted returns.

A High-Yield Opportunity for Income-Focused Investors

Mortgage funds offer income-focused investors a compelling opportunity at present. They combine the contractual distributions of fixed income with the asset-backed security of real estate, and the surety of this backing has been enhanced by the recent market reset.

The real beneficiaries of the recent commercial property revaluation cycle may not be those still chasing capital gains from bricks and mortar, but those who’ve shifted their gaze to the bond-like income streams forged in the shadows of those same buildings.

Mortgage Funds Worth Checking Out

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Disclaimer: This article is prepared by Simon Turner. It is for educational purposes only. While all reasonable care has been taken by the author in the preparation of this information, the author and InvestmentMarkets (Aust) Pty. Ltd. as publisher take no responsibility for any actions taken based on information contained herein or for any errors or omissions within it. Interested parties should seek independent professional advice prior to acting on any information presented. Please note past performance is not a reliable indicator of future performance.