US real estate could be put under serious pressure if the US Federal Reserve鈥檚 interest rates policy changes abruptly, experts at the IP Real Estate Global Awards conference have warned.
The Fed鈥檚 tapering action - coupled with low interest rates - has kept the US real estate market attractive for institutional investors. However, depending on how 鈥榦rderly鈥� the rise in US interest rates will be, investors in US real estate could see their portfolio significantly decrease in value, members of the US panel at the IP Real Estate event, held in Munich, said.
Charles Dana Gibson, chief investment officer at , Greg MacKinnon, director of research at Pension Real Estate Association (PREA) and Gianluca Romano, managing director at Courtland Partners Europe, made up the panel which discussed opportunities in the US, as well as the Fed鈥檚 policy and its medium term effect on the sector.
Romano said: 鈥淭he current Fed policy is one that usually anticipates high inflation. If rates are raised in an orderly fashion, then the real estate sector will see an inflationary period through.
鈥淏ut if the Fed start increasing rates quickly, there is little they(investors) can do. Using instruments such as variable debt funds or inflation-tracking derivatives might serve as a partial hedge but will not be sufficient.鈥�
With rents at 10-year highs, pricing of US assets is 鈥榓ggressive鈥�, the panel noted.
However, prospects for further rental growth make the market still attractive especially in secondary cities such as Austin, Denver, Phoenix, Seattle and so-called gateway markets.
High levels of capital inflows from outside the US confirm the cities鈥� collective attractiveness, the panel agreed. Foreign investors continue to buy assets even in primary markets, paying high prices for them - justified by a long-term view, the panel concluded.
Investors鈥� interest is increasingly shifting to other asset classes in the US especially logistics. With manufacturing now in recovery, and sustainability concerns, the sector鈥檚 supply chain is undergoing a 鈥榬evolution鈥�, with large logistics centres near manufacturing cities (or 鈥榠nland ports鈥�) particularly attractive. Changes in US demographics, with younger families preferring urban locations nearer to workplaces, suggest the wider real estate sector is facing structural changes.
Despite the improved outlook, current investors should, the panel agreed, be braced for a possible decision by the Fed to increase rates in order to curb inflation. That could be followed by the release of large chunks of US debt currently sitting on the bank鈥檚 balance sheet which in turn could expose investors with US real estate portfolios to significant downside.
