EUROPE – Fund managers and analysts expect the influence of rising interest rates on European real estate to remain limited, although international markets like London, Paris and Dublin could prove vulnerable to a sharp increase.
IVG Immobilien's research department has revealed that it considers "the risk of rising interest rates for the property market as limited".
In a note, Thomas Beyerle, head of research at IVG, cited two reasons: interest rates are likely to increase "only very slowly", and rental growth has a more widespread influence on property yields.
He said: "Our models show interest rates do not have a significant effect on [prime] yields in all markets, whereas the development on the rental markets plays a much greater role across the board."
IVG's research suggests prime yields in London, Paris, Dublin and Eastern European office markets are most sensitive to interest rates, which it attributes to a greater predominance of international capital.
"While German and Austrian office markets are dominated by local investors, in the other markets, foreign investors are overrepresented," the report said.
"The former may be guided by the local situation on the rental market, whereas foreign investors are more leveraged and dependent on interest rates."
JP Morgan Asset Management's latest research note also said interest rates were likely to remain low for some time and that any divergence from this scenario would probably be offset by rental growth.
"At present, the most likely scenario is that the European economy will recover at a slow pace, and interest rates will remain low," the report said.
"If the European economy starts growing at a faster pace than expected, the European Central Bank and the Bank of England might decide to increase short-term interest rates, which will affect property prices.
"But strong economic growth will also support rents, which will have a positive impact on property prices – so the overall impact is unclear."
According to JP Morgan, the effects of short-term increases in interest rates would include an end to yield compression in prime markets, rising property yields in weak occupier markets and more investment in non-prime markets.
"Rising interest rates could be a catalyst for investors to move further up the risk curve and turn their focus on non-prime core, regional and secondary markets as they seek higher yields," the report said.
DTZ warned that the UK commercial real estate market – and Central London property in particular – would be particularly vulnerable to an early withdrawal of quantitative easing by the Bank of England.
It said regional office yields in the UK were expected to compress as investment activity picked up outside London, while yields in the capital were forecast to "drift upwards from their current low levels, reflecting expectations of rising Gilt yields".
But DTZ added that, in "an early QE withdrawal scenario", any short-term economic growth would be "negated by asset reduction and interest-rate increases".
It said: "This chokes off the nascent recovery and results in much weaker GDP and employment growth, accompanied by higher Gilt yields."
According to DTZ, London would be more adversely affected than other UK cities because its rental markets would suffer from a drop in international investment and demand.
Richard Yorke, head of UK research at DTZ, said: "Property investors should not fear QE withdrawal, as, ultimately, it indicates a return to more normal economic conditions.
"However, although unlikely, investors should also be aware that any sharp pick-up in the economy that necessitated a more rapid withdrawal of QE could negatively impact the property sector, particularly in London."