Real estate yields will remain under pressure as long as interest rates worldwide linger at historic lows, a panel of leading global real estate investors agreed during a session held in Paris on Wednesday at the annual conference of the European Public Real Estate Association (EPRA).
Asked whether property yields can go any lower, Wen Sheong Linus Lim, head of Philip Capital Management, said there was a huge need to find a sustainable yield and that with the changing demographics of the Asian population, many investors were simply chasing income-yielding assets.
'New normal yields are lower cap rates,' he said.
He added that if he were offered the prospect of buying a property at a yield of 8% to 9%, he would be sceptical about the quality. ‘I think if you were to go and check out the asset you would find it doesn't fit the bill.’
While most scenarios point to an ongoing low interest rate environment in Europe, James Wilkinson, head of listed real estate at Blackrock, noted that some scenarios indicate movement on this front and changes to monetary policy in 2017. 'That could see our sector move down very sharply,' he said.
Indeed, mere hints in this direction by central bank governors have already moved stock markets by 10-20%, he added. ‘Is there such a thing anymore as risk-free rates?’ he asked rhetorically. ‘That anchor has gone,’ he continued. ‘We should call it reference rates.
Steve Buller, head of listed real estate at Fidelity, took a contrarian view and noted that Europe could enter a protracted period of low interest rates and economic stagnation or even deflation. 'Europe could look like what has happened in Japan and see two decades of nothing. That could persist for a long time.'
