Moderately rising rates won't materially impact property valuations

Articles | 13 December 2017

Head of Global Property Securities Stephen Hayes shares his 2018 property outlook.

With an improving global economic back drop and falling unemployment rates in most developed countries, the outlook for continued high occupancy rates for investment grade real estate is encouraging. The low interest rate environment has seen private market values elevated. While supply is increasing in some markets, developers and landlords can still make new developments pencil. In most markets, strong tenant demand combined with new supply is resulting in market equilibrium. Moderate rental market growth and high occupancy rates are supportive of secure cash flow growth. Interest rates are expected to moderately rise in 2018, which may cause some short term volatility in the sector, but overall we do not believe moderate rate rises will materially impact valuations.

Within the United States, the outlook for the single family rental sector (freestanding housing) is expected to remain healthy with tax reform likely and moderately rising interest rates. Hotels should also benefit from the improving economy and increased corporate spend. The West Coast office markets should also continue to benefit from the strong employment growth.

Within Europe, the Madrid and Paris office markets are set to tighten as market vacancy rates fall to low levels, with market rental growth looking to increase. The German housing markets are also well placed for continued cash flow, particularly Berlin. 

Economic growth in the United Kingdom is expected to continue to slow in 2018 as decision-making is halted until the final BREXIT deal is known. The London office market is likely to experience a slight increase in vacancy rates. Retail sales are likely to remain subdued due to imported inflation impacting household finances. 

The improving Japanese economy is expected to continue to support the Tokyo office market with strong tenant demand outstripping supply with market vacancy rates to remain low. The Singapore and Hong Kong property markets are also likely to remain well placed into 2018, as their economies are supported by improving global trade.

This document is issued by Colonial First State Asset Management (Australia) Limited AFSL 289017 ABN 89 114 194311.This document is directed at persons of a professional, sophisticated or wholesale nature and not the retail market. This document has been prepared for general information purposes only and is intended to provide a summary of the subject matter covered. It does not purport to be comprehensive or to give advice. The views expressed are the views of the writer at the time of issue and may change over time. This is not an offer document, and does not constitute an offer, invitation, investment recommendation or inducement to distribute or purchase securities, shares, units or other interests or to enter into an investment agreement. No person should rely on the content and/or act on the basis of any matter contained in this document. This document is confidential and must not be copied, reproduced, circulated or transmitted, in whole or in part, and in any form or by any means without our prior written consent. The information contained within this document has been obtained from sources that we believe to be reliable and accurate at the time of issue but no representation or warranty, express or implied, is made as to the fairness, accuracy or completeness of the information. We do not accept any liability for any loss arising whether directly or indirectly from any use of this document. References to “we” or “us” are references to Colonial First State Global Asset Management (CFSGAM) which is the consolidated asset management division of the Commonwealth Bank of Australia ABN 48 123 123 124. CFSGAM includes a number of entities in different jurisdictions, operating in Australia as CFSGAM and as First State Investments (FSI) elsewhere. Commonwealth Bank of Australia (the “Bank”) and its subsidiaries are not responsible for any statement or information contained in this document. Neither the Bank nor any of its subsidiaries guarantee the performance of the fund or security or the repayment of capital. Investments in the fund or security are not deposits or other liabilities of the Bank or its subsidiaries, and the fund or security is subject to investment risk, including loss of income and capital invested. Past performance is not a reliable indicator of future performance. Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell. Reference to the names of any company is merely to explain the investment strategy and should not be construed as investment advice or a recommendation to invest in any of those companies. Copyright © (2017) Colonial First State Group Limited. All rights reserved.