The Wall Street Journal reports on the risks a reversal in interest rates presents to the bubble conditions in commercial real estate created by far too easy money from the world’s central banks for far too long.
The commercial real-estate boom of the past few years has been driven by global investors seeking out returns better than those found in low-yielding bonds. But that dynamic could start reversing, analysts said, as ultrasafe government bonds start to offer yields that make commercial property look less desirable in comparison, given the potential risks.
Bonds have sold off beyond the U.S. because investors think U.S. President-elect Donald Trump’s plans to spend on infrastructure might lead the Federal Reserve to raise interest rates more aggressively than expected, which in turn could ripple through to other central banks. While the selloff has been greatest in the U.S., government bond prices are down sharply across the world. Eventually, that could impact property.
To be sure, interest rates and bond yields remain extremely low. The Bank of England lowered its benchmark rate in August to 0.25%—the lowest in its 322-year history—from 0.5%, where it had been since 2009. The German 10-year bond is yielding 0.3%, up from negative territory earlier this year, but still well below the nearly 2% yield from three years ago.
At the moment, property chiefs and analysts stop short of predicting a sudden global decline in property values. But concerns have been growing.
“There is a danger in real-estate markets that, because of lower-for-longer policies…values have not been driven by fundamentals,” said Chris Taylor, chief executive at the property arm of Hermes Investment Management, the London-based asset-management firm. Mr. Trump’s new policy proposals “bring into sharper focus what’s been driving real-estate markets.”
Jeremy Jones, CFA
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