Another week, another round of conjecture over the ‘what’ and ‘when’ of so-called ‘impending’ interest rate rises comes to a close, leaving investors with the entire weekend to stew over newly-planted concerns.
However, while many would have you believe that a rising rate environment will take your real estate investments to the cleaners, Philippa, manager of the Fidelity Global Property Fund, is preparing himself for the opposite outcome.
“We are playing the World Cup of currency depreciation, and I do not expect it to end anytime soon,” he said. “This environment is quite favourable to ‘real’ asset classes, and the real estate sector will be one of the key beneficiaries of the rising interest rate environment.
“There is a myth that rising interest rates are always bad for real estate. Historically, REITs have had periods of both underperformance and outperformance in rising rate environments.”
As well as citing past performance in rising rate cycles, Philippa anticipates that the nature of the upcoming rate hikes will provide elbow room for real estate investors.
“We have had very loose monetary over the last few years,” he expanded. “Every time that a developed nation has tried to raise interest rates they have had to reverse it soon thereafter.
A substantial raise would have an effect, but we are living in a highly leveraged society and this is unlikely to happen.
Philippa continued: “We are in year seven of the recovery – maybe halfway through – and I expect this low interest rate environment to continue for some time. It is unlikely that we will be going back to normal rates of 5% for a very long time.
“The drop in interest rates during the downturn is not been fully reflected in the low cap rates, and there is a buffer of 150-200 basis points. Also, when rates rise the market often expects higher economic growth and therefore higher rental growth, which is not bad for real estate-focused companies.”
With this outlook in mind, Philippa is positive on Asia Pacific ex Japan, which accounts for a portfolio overweight of more than 6%.
Philippa likes Hong Kong, highlighting discounts to NAV of 50-80%, good balance sheets, implied cap rates of 7-9% and underlying assets transacting at around 4%. However, it is in China that he believes there will be a particularly intriguing crop of opportunities.
“China is an interesting investment,” he expanded. “Sentiment has been weak over the last quarter, but the housing market is one of the few bright spots. I think the government will continue to loosen monetary policy further, and valuations are also good.
“Compared to what was happening three years ago, the amount of overbuilding in China is significantly less. China has already been through a re-pricing of their units and, depending on the footprint of these companies, the market is actually doing pretty well and the underlying fundamentals are reasonably strong. Together with valuations, the government being likely to loosen monetary policy further makes China an interesting prospect.”
