“Interest rates around the world have been very low for some time and now there is the real prospect that the US, in particular, is thinking of increasing interest rates.
“Conventional wisdom has it that when interest rates increase real estate does poorly, and vice versa. Indeed, real estate is often considered a bond proxy. But the data doesn’t necessarily back this up and rising interest rates are not always the enemy of real estate.
“We have long argued that real estate valuation is far more nuanced than a simple net present value of static cash flows.
“People tend to forget that real estate is a growth asset as well. If interest rates are increasing because the economic outlook is improving, that may be a net positive for real estate.”
Mr Bedingfield points to the past interest rate rising cycle in the US – between 2004 and 2007 - where rates went from around 1 per cent to almost 4.5 per cent.
“Over that period, US real estate companies put in a total return of over 60 per cent – almost double that of US equity markets during the same period.
“For real estate investors, rising or falling rates is not necessarily positive or negative because the key to successful real estate investing is to understand the demand and supply equation.
“We look for investment opportunities where there is a demand / supply imbalance; and where underlying demand for space is greater than overall supply. That is usually a positive for real estate as landlords can increase rents and grow their cash flows, regardless of other economic considerations.”
However, the prospect of rising interest rates does influence the types of property investments that should be undertaken, Mr Bedingfield says.
“In some areas of the real estate market, there is a risk they will be overly exposed to the rising rates environment. Examples of that are real estate companies with exposures to very long leases, very certain cash flows, and contracted rents.
“Healthcare is a good example of that. Healthcare property doesn’t really benefit from improved economic activity associated with rising interest rate cycles. If the US economy improves, for example, this doesn’t have a correlation to more people getting sick or old. For this reason, healthcare is one area that tends to be more exposed in a rising rates environment.
“On the other side of the equation, office and retail, plus rental apartments do tend to do quite well in a rising interest rates environment if it correlates with job and wages growth.”
On the whole, Mr Bedingfield is optimistic about the prospects in global real estate markets.
“Yes, rental growth will moderate, but we still believe a well-constructed portfolio of quality global listed real estate securities will generate our targeted total returns – of CPI plus 5 per cent - over the medium and long term.