Interest rates need to rise if real estate investors are to put cash to work, says Sam Zell.

The Equity Group Investments chairman told delegates at the Chicago Council on Global Affairs this week that an interest rate rise would put an end to investors sitting on large liquid balances.

He said business decision-making under prevailing low rates was akin to the way professional basketball was played before the introduction of a limit on how long a team could possess the ball before taking a shot.

鈥淚nterest rates should go up,鈥� said Zell. 鈥淚n a way, interest rates, and where they are, is like not having a shot clock 鈥� there鈥檚 no sense of urgency,鈥� he said.

Zell, referencing Grant鈥檚 Interest Rate Observer, which contends that positive real interest rates above the rate of inflation force investors to put cash to work, said increased interest rates 鈥渨ould help鈥�, with no harm to property markets.

鈥淒o I think we鈥檙e going to see a significant increase in interest rates?鈥� Zell asked. 鈥淣o. Do I think rates could be raised 100 basis points and have no impact whatsoever? Yes.鈥�

A rate hike after a sustained period of near-zero rates would 鈥渘udge rates back towards a normal footing鈥�, Zell said.

鈥淭hey鈥檙e beyond the point at which they are impactful in the decision-making process, and, once that鈥檚 the case,  they鈥檙e no longer an instrument of change,鈥� he said.

鈥淓xtraordinary excesses of liquidity鈥� around the world, he added, meant 鈥減eople are paying preposterous prices鈥� for some commercial properties.

US property markets are benefiting from Chinese exports of capital, but foreign investment in the US could slow.

鈥淧robably the strong dollar is a little discouraging,鈥� he said.

On investing in China, Zell said: 鈥淚 don鈥檛 think it鈥檚 a place where I particularly want to have a big footprint.鈥�

China benefits, he said, from being 鈥渟emi-totalitarian, and, therefore, people get things done.鈥�

But 鈥渢he Chinese are primarily for the Chinese鈥�, he said.

鈥淭here鈥檚 a limit to a foreigner鈥檚 success there.鈥�

Equity Group鈥檚 experience was illustrative.

鈥淲e invested in China early and did very well,鈥� Zell said. 鈥淲e invested later and got our ass handed to us.

鈥淲hen we were early, they couldn鈥檛 wait to hear our ideas and implement them accordingly. Later on, they didn鈥檛 understand English.鈥�

The experience highlights a key risk facing investors in emerging market property sectors.

鈥淵ou trade growth for the rule of law,鈥� Zell said.

Success requires having the right partner in each country, he said, 鈥渟omeone local and powerful鈥� who is taking the same risk.

鈥淚f there is some kind of a political problem, reading the documents is not going to tell you much,鈥� he said.

While admitting there is always risk from sector-specific factors 鈥� such as office space redeployment 鈥� Zell said US property fundamentals were 鈥渟ound鈥� and that institutions would continue to allocate greater amounts of capital to the asset class.

The financial crisis, he said, 鈥渨as the first time since World War II that the US entered something where commercial real estate was not in oversupply鈥�.

鈥淪o we took the economic hit, but we didn鈥檛 have empty buildings anywhere in the country,鈥� Zell said.

The strong performance of property in the past several years demonstrates 鈥渞eal estate鈥檚 ability to move from there and to be an even more attractive investment鈥�, Zell said.

Multifamily housing in the US has a particularly bright future, as households are formed later and home purchases are delayed.

鈥淭he most significant demographic event of the last 30 years has been the deferral of marriage,鈥� said Zell.

And that trend will not change soon.

For millennials, he said, the American Dream is 鈥渇reedom, not buying a house鈥�.

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