A bond bubble bust: what it means for real estate

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With equity markets approaching all time highs, and fixed income markets still sitting near all time lows, the prospect of higher interest rates has been unsettling markets. But investment opportunities exist in all market cycles says Chris Bedingfield, principal and portfolio manager of Quay Global Investors.

“Interest rates around the world have been very low for some time and now there is the real prospect that the US, in particular, is thinking of increasing interest rates. 

“Conventional wisdom has it that when interest rates increase real estate does poorly, and vice versa. Indeed, real estate is often considered a bond proxy. But the data doesn’t necessarily back this up and rising interest rates are not always the enemy of real estate.

“We have long argued that real estate valuation is far more nuanced than a simple net present value of static cash flows.

“People tend to forget that real estate is a growth asset as well. If interest rates are increasing because the economic outlook is improving, that may be a net positive for real estate.” 

Mr Bedingfield points to the past interest rate rising cycle in the US – between 2004 and 2007 – where rates went from around 1 per cent to almost 4.5 per cent.

“Over that period, US real estate companies put in a total return of over 60 per cent – almost double that of US equity markets during the same period. 

“For real estate investors, rising or falling rates is not necessarily positive or negative because the key to successful real estate investing is to understand the demand and supply equation.

“We look for investment opportunities where there is a demand / supply imbalance; and where underlying demand for space is greater than overall supply. That is usually a positive for real estate as landlords can increase rents and grow their cash flows, regardless of other economic considerations.”  

However, the prospect of rising interest rates does influence the types of property investments that should be undertaken, Mr Bedingfield says.

“In some areas of the real estate market, there is a risk they will be overly exposed to the rising rates environment. Examples of that are real estate companies with exposures to very long leases, very certain cash flows, and contracted rents. 

“Healthcare is a good example of that. Healthcare property doesn’t really benefit from improved economic activity associated with rising interest rate cycles. If the US economy improves, for example, this doesn’t have a correlation to more people getting sick or old. For this reason, healthcare is one area that tends to be more exposed in a rising rates environment. 

“On the other side of the equation, office and retail, plus rental apartments do tend to do quite well in a rising interest rates environment if it correlates with job and wages growth.”

On the whole, Mr Bedingfield is optimistic about the prospects in global real estate markets.

“Yes, rental growth will moderate, but we still believe a well-constructed portfolio of quality global listed real estate securities will generate our targeted total returns – of CPI plus 5 per cent – over the medium and long term. 



For further information, please contact:

Leeanne Bland
Pritchitt Partners
0417 470 421


About Bennelong Funds Management

Bennelong Funds Management (Bennelong) is a boutique fund manager nurturing a growing suite of asset management teams. Bennelong’s boutique partners collectively manage over $7.5b in funds under management. Bennelong is a wholly owned subsidiary of the Bangarra Group (formerly known as the Bennelong Group), a privately owned company encompassing a number of independent businesses.

Visit bennelongfunds.com


About Quay Global Investors

Quay Global Investors is a boutique investment manager focused on the preservation and creation of wealth through innovative strategies in real estate securities.

Quay was launched in May 2015 as a partnership with principals Justin Blaess and Chris Bedingfield and Bennelong. Prior to this, the business operated as Quay Real Estate Advisors which was founded by Justin and Chris in 2013. 

The founding partners have over 40 years of collective experience in direct property, equities research, investment banking and investment management across domestic and global markets, giving them a unique skill set and perspective which they bring to the management of a portfolio of global real estate securities.

Visit quaygi.com