Interest rate hikes ricochet off the concrete gold

FFor most stocks, the increasingly concrete thoughts of the US Federal Reserve regarding rate hikes promise more troubled times. However, the planned increases should impact the real estate sector much more slowly.

In the real estate market, it is important that loan interest rates are usually determined against the yields on ten-year government bonds. “If the expectations of the American market are confirmed, even an increase in the key interest rate to 1.75 percent in the next two years will have little effect on bond yields,” says Edgar Walk, chief economist at Metzler Asset Management. The real yield on ten-year US Treasuries currently fluctuates between minus 0.5 and minus 1.0 percent. Under these conditions, stocks and real estate continued to be interesting.

The analysts of the American asset manager Principal provide a historical example of the effects of extreme interest rate movements on property returns. During the recession of the early 1980s in the United States, Paul Volker, then head of the Fed, raised the key interest rate at short intervals to counter the rapid inflation. Between the second quarter of 1982 and the third quarter of 1983, ten-year US Treasury bond yields exceeded real estate yields.

Financing remains historically cheap

In the absence of such a drastic change in the monetary policy of the European Central Bank (ECB), Wüstenrot & Württembergische (W&W) also sees stable demand in the German real estate market in the medium term. “Even in the event of an increase in real estate interest rates, real estate financing will remain historically cheap for the foreseeable future,” wrote a spokesman for the W&W of the FAZ

An interest rate hike could have a stronger impact on the demand for home loan and savings contracts. Again depending on the monetary policy of the ECB, W&W expects positive impulses in this segment. “Customers react sensitively and at an early stage, because securing the low interest rate is the decisive product advantage of a home loan and savings contract,” explained the spokesman for W&W.

Tom Carstairs, analyst for real estate stocks at the American investment bank Stifel, does not see the loan portfolios of German real estate companies being threatened: “In the past ten years, companies have refinanced and secured cash flows with long fixed interest rates on good terms.” Any rate hikes took time to to be reflected in the loan portfolios. Only investment decisions could be postponed due to rising interest rates.

Real estate stocks nevertheless sensitive

However, there is still uncertainty for the shares of real estate companies. The publication of the Fed minutes last week put a damper on the Euro Stoxx Real Estate sector index. It fell from 228 to 218 points within a few days. Carstairs suspects that investors may reassess their positions despite the stable situation of real estate companies. “Within the portfolio, we may soon see a reorientation towards companies such as banks that benefit from higher interest rates,” says Carstairs.

If you still rely on them, a distinction must be made between the values ​​of residential and commercial property specialists. On the basis of the past two years, Carstairs has observed different trends among the various providers. Depending on the risk appetite of the market, these two sectors developed divergent in 2020 and 2021. When the equity markets slumped in early 2020, investors sought protection in stable stocks, including what is believed to be resilient housing company stocks. The need for stability had damaged the commercial real estate. In turn, 2021 was a very good year for the Dax and shares in residential property specialists came under pressure.

He now sees it similarly for the near future. A low risk appetite in the market would benefit residential real estate due to the continued high demand. If, on the other hand, the market is looking for high-risk investments, money will more likely flow into the values ​​of commercial real estate providers. However, the various commercial segments of the hotel, retail, logistics and office are also subject to major trends, such as online trading that has grown stronger during the pandemic or the high technical demands placed on offices.

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