Real Estate - JANUARY 8, 2015

Interest rates can only go one way: up

by Lauren Parr

For global investors of all persuasions there is one great certainty: interest rates will rise at some point. Since the recession, western governments have maintained rates at exceptionally low levels — in most countries, close to zero — so there is only one way that they can go and that is up.

Beyond this little disputed fact, “it’s nebulous,” acknowledges Joe Valente, head of real estate research and strategy at J.P. Morgan Asset Management.

Multi-asset investors work off various assumptions about how the different macroeconomic scenarios around the globe might play out in order to decide what allocation strategies to pursue. Of direct and immediate impact on investors are potential interest rate movements and/or monetary policy changes, and for this reason interest rates remain under careful watch.

The major world economies are on increasingly divergent paths. The U.S. Federal Reserve is expected to be the first of the central banks to start increasing interest rates. The Bank of England is also eyeing tighter policy now that the United Kingdom’s economic recovery is gaining traction. Yet, in Europe, the European Central Bank is still mulling over whether it should — or even can, given continuing German resistance — ramp up its stimulus efforts with the euro zone facing the prospect of deflation.

The most pressing risk in the six months ahead is that the euro zone falls back into outright recession. Valente comments: “The big concern is whether the ECB is capable of delivering the full-blown quantitative easing that will be required.”

In the face of volatility, investors will continue to invest in real assets such as property and equities as a hedge against uncertainty. These are best placed in the current environment as they offer better income than fixed-income bonds and some capital growth linked to the general economy.

A consequence of low interest rates worldwide has been international investors’ hunt for yield across asset classes and geographies. Almost no matter what happens to economies, there will remain a wash of liquidity from high-net-worth individuals, sovereign wealth funds, pension funds and insurance companies looking for a home. Valente sees a structural case for a very strong increase in allocations to real estate over the next five years as “most investor groups remain well underrepresented in real estate.”

Even with rising interest rates, as economies pick up steam, most property sectors should perform well as new development remains relatively muted.

Lauren Parr is a freelance writer based in London.

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