4th December 2015
Rising interest rates will not temper the growing interest in real estate investments, according to Tom Walker, manager of the Schroder Global Property Securities fund. Below he explains why…
While there is a belief that an interest rate rise could dampen the growth of real estate and cause the sector underperform, the managers said this is ‘misguided’.
Looking back over 2004 to 2006, which saw a total of 17 US Fed rate increases against the background of an improving economic climate, it can be seen that the US-listed real estate market still delivered returns of almost 80%.
Moreover, compared with the yields against government bonds, listed real estate yields look strong. Even in markets such as the US West Coast and London, bond yields will have to rise by a notable margin to be a threat.
A rate rise of 0.25% has been predicted by economists but Walker and Machin said it was of ‘little significance’ and won’t increase lending costs. Indeed, growth in rents should more than offset lending costs.
Demand for rental property is also set to increase in major cities which is good news for the listed market, which tends to own the best assets in prime areas.
As long as there is sustained rental growth, then any modest increases in interest rates are unlikely to have any significant effect on the attraction of these assets for investors.
The largest risk to the property sector is oversupply as developers push ahead with construction. However, construction is only being undertaken on space that has already been let.
The low level of supply means that those companies owning property in the more desirable locations are seeing, not just capital appreciation, but rental growth too.
In addition, the curb in bank lending to real estate has been seismic. Legislation makes it very costly for banks to lend to developers. This has given listed real estate companies, with access to the bond market, a competitive edge in developing or refurbishing assets.