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Global ‘risk-free’ rates in perspective

Mike Keogh

In an income-deprived world, the yields offered by commercial real estate is attractive especially against government bond yields. Michael Keogh, Associate Director of Research & Strategy, discusses how this is set to change in the next few years.

2014 was a good year for commercial real estate, with investment volumes rebounding across the majority of global real estate markets.

Whilst some market pricing may be starting to unsettle investors, it is worth remembering in an income-starved world, that the yield on real estate continues to be attractive, particularly when benchmark 10-year government bonds have retreated to all-time lows, and Germany and Finland are selling five-year debt at a negative yield. There are different reasons why some investors are prepared to technically accept a loss on their cash, whether its fears of deflation or regulatory changes, as is the case with pension and life funds.  However, with the ECB buying €60bn of bonds per month until September 2016, property can expect to benefit from increased equity from a variety of investors increasing their allocation to the sector.

The chart below shows current 10-year bonds, the 2019 forecast according to Oxford Economics, and the average recorded in their respective markets between 2000 and 2014. Arguably, the last seven years have ‘artificially’ skewed the average downwards, but the borrowing rates in five years’ time will still remain well short of the trend in markets across Europe. In part, this reflects the low growth, low inflationary backdrop envisaged, but it also provides some comfort towards present and future real estate pricing. In contrast, with the exception of Japan, borrowing rates in the Asia-Pacific look set to rise above the ‘artificially low’ trend rate of the last 14 years.  Performance in these markets will better reflect rental growth from their strong economies than any pronounced near-term yield compression.

10 year government bond yields %
Source: Oxford Economics, Q1 2015, Bloomberg, 27 February 2015

This article is intended solely for the use of professionals and is not for general public distribution.

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Michael Keogh

Mike Keogh

Director of Research

Mike's biography