Real Estate Pricing

Real Estate: pricing in a changing interest rate environment

• Interest rates fell steadily in many developed economies during the four decades from the early 1980s.
• Talk of ‘lower for longer’ interest rates morphed into the possibility of a ‘lower for ever’ interest rate environment.
• However, 2022 saw a dramatic change as policy rates were increased to curb inflation, putting pressure on risk assets including real estate.
• Despite moderating inflation and stabilising central bank policy rates, there is little expectation of a return to the ultra-loose monetary policy of the last 10-years.
• In addition to the general impact of higher rates used to discount future rents, direct property markets have been impacted by higher debt financing costs.
• But direct property markets are diverse and heterogeneous. We see wide differences in the prospects for low-yielding ‘core’ real estate, which has been slow to react to higher rates, compared with parts of the market that have re-priced more quickly.
• As a general rule, we expect superior long-run returns from higher-yielding segments of the market through careful building selection and active asset management.
• Such buildings, the values of which have been more rapidly marked down relative to lower-yielding core assets, should benefit from a re-pricing as interest rates fall combined with higher income growth through active management.

Read our paper to find out more.