Will Rising Interest Rates Pummel Your Portfolio?

Transcription

1 Will Rising Interest Rates Pummel Your Portfolio? ULI Fall Meeting Chicago - November 2013 Dr. Richard Barkham, MRICS Global Research Director, Grosvenor Group Eileen Marrinan, CRE Director of Research, Grosvenor Americas Europe North America 1

2 Will Rising Interest Rates Pummel Your Portfolio? The International Perspective ULI Fall Meeting Chicago November

3 The Global Recovery is Gaining Strength 3

4 Interest Rates are Set to Increase Over the Next Five Years Central bank interest rate, % Japan United Kingdom Hong Kong Eurozone United States Source: IHS Global Insight, Grosvenor 4

5 Long-Term Bond Rates Already Have Started to Move 10-year bond rates, % Japan United Kingdom Hong Kong Eurozone United States Source: IHS Global Insight, Grosvenor 5

6 What Will Be the Impact on Capitalization Rates? Interest rates Economic growth (rental pressure) 6

7 This is New Research 7

8 Moscow Beijing Warsaw Budapest Lyon Shanghai Lisbon Brisbane LA Melbourne Oslo Prague Brussels Birmingham Sydney Glasgow Rotterdam Helsinki New York Edinburgh Manchester Rome Amsterdam Dublin Copenhagen London City Madrid Stockholm Milan Barcelona Dusseldorf Paris: CBD Berlin Frankfurt Hamburg Munich London WE Hong Kong Tokyo What Drives Global Cap Rates? Cap rate, % /- one standard deviation Long-run average office yield Source: Grosvenor 8

9 International Long-Run Cap Rate Model Bond rate 100 bps Cap rate 62 bps Bond rates and inflation are the key drivers (R 2 = 74.5%) 100 basis point change in bond rates leads to a 62 basis point change in cap rates 9

10 Hong Kong Helsinki Berlin Dusseldorf Frankfurt Hamburg Munich Stockholm Copenhagen Birmingham Edinburgh Glasgow London: West End London: City Manchester Oslo Brussels Lyon Paris: CBD Amsterdam Rotterdam LA New York Sydney Brisbane Melbourne Prague Tokyo Dublin Warsaw Milan Rome Barcelona Madrid Shanghai Beijing Budapest Lisbon Moscow Forecast Cap Rate Shift Due to Bond Rate Movements Cap rate shift until 2018 implied by bond rate movements, bps Source: Grosvenor 10

11 Long-term Analysis of Selected Markets Bond rates and rental pressure over time London, Paris, Hong Kong, New York, Los Angeles 11

12 Bond Rate Impact in Each Market Coefficient of bond yields Adjusted R % % 80% % 60% 50% % 79% 89% 81% % 58% 65% % 10% 0.0 London West End Paris Hong Kong New York Los Angeles 0% London West End Paris Hong Kong New York Los Angeles Source: Grosvenor 12

13 Office Cap Rates, Forecast with No Rental Growth Cap rate, % London West End Paris Hong Kong New York Los Angeles Source: Grosvenor 13

14 Office Cap Rates, Forecast with Rental Growth Cap rate, % London West End Paris Hong Kong New York Los Angeles Source: Grosvenor 14

15 Conclusions An International Perspective Bond rates are always a powerful and significant driver of cap rates Rental pressure variable relatively weak If interest rates normalize, we should expect cap rates to follow 15

16 But Will Interest Rates Normalize? Fiscal contraction could last 18 months The Great Wall of China 16

17 Will Rising Interest Rates Pummel Your Portfolio? The View from the US ULI Fall Meeting Chicago November

18 Expected Performance of the Economy Real GDP and 10-year Treasuries Our forecast calls for stronger economic growth after Interest rates will normalize by % 5% 4% 3% 2% 1% 0% -1% % -3% Real GDP 10-Yr Treasuries 18

19 Cap Rates vs. Treasuries Average Cap Rates and 10-Yr Treasuries Source: Real Capital Analytics (2Q13) Average Cap Rate Spread over Treasuries Source: Real Capital Analytics (2Q13) 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 01Q1 02Q1 03Q1 04Q1 05Q1 06Q1 07Q1 08Q1 08Q1 10Q1 11Q1 12Q1 13Q Q1 02Q1 03Q1 04Q1 05Q1 06Q1 07Q1 08Q1 08Q1 10Q1 11Q1 12Q1 13Q1 Average Cap Rate (All Sectors) 10-Yr Treasury Rate Cap rate spreads over Treasuries are cyclical, not fixed 19

20 Cap Rate Spreads Apartment vs. Office Apartment Spreads over 10-yr Treasuries Gateway and Non-Gateway Metros Office Spreads over 10-yr Treasuries Gateway and Non-Gateway Metros Gateway Apartment Non-Gateway Apartment Gateway Office Non-Gateway Office Historic Range Average Spread Current Spread * Gateway Metros = Boston, Manhattan, Washington DC, Chicago, San Francisco, Los Angeles Non-distress transactions $15M+ The apartment sector has the smallest average spread to Treasuries -- office has the largest. 20

21 Rent Growth Across All Sectors Average Effective Rent Growth Trends by Sector Source: CBRE-EA (2Q2013), GA Research Real estate fundamentals will continue to improve, favoring spread compression. 12% 9% 6% 3% 0% % -6% -9% -12% Apartment Office Retail 21

22 Rising Investment Activity Capital will continue to flow into real estate. With rising foreign interest, a crowding in of capital? Bil $180 $160 $140 $120 $100 $80 $60 $40 $20 Real Estate Transaction Volumes All-Sector Source: Real Capital Analytics 12% 10% 8% 6% 4% 2% $0 01Q1 02Q1 03Q1 04Q1 05Q1 06Q1 07Q1 08Q1 08Q1 10Q1 11Q1 12Q1 13Q1 0% Total Sales Volume (L) Cross-Border Sales Pct of Total (R) 22

23 Execution Will Be Key... CBOE Market Volatility Index (VIX) Source: Moody's Analytics (through 10/07/13) The speed and timing for Fed unwinding of monetary policy will be critical Q1 02Q1 03Q1 04Q1 05Q1 06Q1 07Q1 08Q1 08Q1 10Q1 11Q1 12Q1 13Q1 23

24 Conclusions The View from the US US economic growth will strengthen over the next five years interest rates will normalize ( bps) Rising interest rates will be largely offset by cap rate compression Capital flows into US real estate may result in no upward adjustment in cap rates Sustained investor confidence will be critical to achieve this outcome 24