How will the U.S. interest rate rise affect real estate?

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what-does-the-US-rate-hike-mean-for-real-estateWith U.S. interest rates rising from historic lows for the first time in 2006, real estate investors are fine tuning their strategies for a new chapter in the country’s economic recovery.

“This first move is as much psychological as it is financial and should be seen as a sign of strength and confidence in the U.S. economy,” says David Green Morgan, Global Capital Markets Research Director at JLL.

He believes that the real impact of the widely expected move is going to be on the mind-set and motivation of investors. “No longer will reducing rents be enough to attract tenants,” he explains. “The wider market lift we have witnessed in the last few years is evaporating and there must be a greater focus on asset management; manage your building better than the one down the road and you will attract more profitable tenants, and invest for income rather than capital values at this point in the cycle.

While hike in U.S. interest rates marks a significant turning point in the current economic cycle it shouldn’t unduly worry investors, says Andrew Burrell, Head of Forecasting in Europe, the Middle East and North Africa for JLL. “The Fed is clear that this is not the start of an aggressive tightening, but that future interest rate movements will be gradual and cautious.”

And although much has been made around the timing of this first upward movement in rates, real estate investors will be more interested in the frequency and size of any future increases in 2016, Green Morgan adds.

The effects beyond the US

However, the move is unsettling homeowners outside of the U.S. In Hong Kong, where the Hong Kong dollar is tied to the US dollar, the rate rise could be another factor to cool the world’s most expensive housing market which seen prices soaring in the past 10 years and the average family spending half of their income paying off their monthly mortgage.

“The underlying issue is one of affordability being very, very stretched,” Paul Louie, a Barclays property analyst tells the Wall Street Journal, with rising rates being “one of the trigger points” for a slump in prices.

In Europe, where the economic recovery over the last 12 months has been broad-based and sustained by domestic demand, the Fed’s move will have limited impact on growth in the Eurozone which is set to continue strongly over the next two years.

“This will help sustain the revival in occupier activity and office take-up that has been seen over recent quarters,” says Burrell. “Property will remain highly attractive relative to other assets because there is more demand than supply and this is reflected in increasing rental growth.”

Indeed, across the world’s ten major real estate markets, the economic fundamentals are looking strong. “The common thread tying them together now is improving the tenant profiles and rental growth; this is where savvy investors will focus their attention,” Green Morgan concludes.

This article was originally published on JLL Real Views

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