Rates rise up the agenda

Our investor survey has repeated the same message year on year: institutional real estate allocations continue to rise or remain stable. For several years now the asset class has been an inadvertent beneficiary of central-bank monetary policy and low interest rates, while also enjoying its place in a wider move to alternatives and real assets.

We are unlikely to see a reversal of this situation any time soon, but it is also always dangerous to rely on assumptions.

For the first time this year we asked investors whether they expected interest-rate changes to affect their real estate allocations over the next 18 months. So while most investors have either increased (35%) or maintained (56%) their real estate allocations, 17% are anticipating interest rates to affect their allocation strategies in the next 18 months.

These investors are in the minority, but it is at least a sign that the potential for rising interest rates is beginning to creep onto agendas. 

We look at what rising interest rates could really mean for real estate markets, starting with the US, which is at the forefront of a potential reflationary period. Real estate could perform well if rate rises – but only if economic growth supports rental growth.

The question for investors is how to invest in Europe today. Should they go up or down the risk curve?

If the situation in the US can be described as a simple two-person sprint, then in Europe it is a complicated, cross-country endurance race. Most of Europe is far behind the US in this respect, but the UK is already beginning to experience post-referendum inflation. A bifurcation between the UK and the continent is highly likely.

The question for investors is how to invest in Europe today. Should they go up or down the risk curve?

AustralianSuper has been investing in the US and Europe in recent years, including some large acquisitions in the UK, including its AUD1.4bn (€966m) investment in London’s King’s Cross regeneration. More recently, it has found more opportunities in the US while struggling to find sizeable deals in Europe.

“The sort of assets we are targeting are north of US$500m (€459m), so there are not a lot of opportunities,” says AustralianSuper’s Jack McGougan in a recent interview. “We have to be patient, and we will continue to monitor the market.”

The AUD104bn AustralianSuper comes in at 49 on our latest top 100 ranking of global real estate investors. As last year, the Abu Dhabi Investment Authority comes first. The full list is availble here

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