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Geopolitics and property: impacts and crossovers


A change of direction in the US has the investment markets believing inflation is going to return, so it seems the “chase for yield” has started to thaw.


 

They say a week is a long time in politics, but a month is a lifetime. This has definitely been the case in the past month. Before the US election, the outlook for inflation and interest rates was lower for longer, supporting seemingly insatiable demand for real estate yield from the investment community.

But a change of direction in the US has the investment markets believing inflation is going to return, so it seems the “chase for yield” has started to thaw.

Interest rates are now likely at the bottom of their cycle and governments are working to lift inflation.

From a real estate point of view, any sign of stronger economic growth is positive as it should support demand for real estate accommodation, rental growth and retail sales.

But if investors are wanting a higher return in bonds because inflation expectations are rising, real estate prices could have to adjust if you cannot get rental and occupancy growth to compensate.

At the moment, there is still a huge gap between property yields and bond yields so this is not an immediate issue.

On balance the likelihood of a downturn in the commercial property market is low, but the strong growth in property prices is likely behind us.

About the author
Michael Kingcott is the Head of Property Investment Strategy and Research at AMP Capital leading commercial property research and investment strategy.
 
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