Should investors seek above-average property returns?

A substantial compression in gross initial prime yields over the last five years, coupled with the prospect of rising interest rates, is casting a cloud of uncertainty over property markets, commercial and residential alike. However, many property markets performed remarkably well in 2017. Even though key factors, such as interest rates, introduced a degree of ambiguity into the real-estate universe in 2017, many commercial and residential markets enjoyed another stable (or strong) year. Property performance matched or surpassed our expectations for most real-estate areas.

So what does the future hold?

Commercial property returns will slow from last year’s attractive levels. Even though occupational markets are in good shape in many economically-mature markets, interest rates — set to rise modestly — may no longer underpin property returns. Property yields are at threat from rising risk-free rates. Capitalisation rates should stabilise or move out somewhat, thus logically hampering capital appreciation returns. The same rationale can be used for other housing markets.

In this context, holding a portfolio of real-estate assets spread across segments and countries is relevant for income diversification rather than outperformance.

Find our recommendations in our upcoming property report « Should investors seek above-average property returns? »