Property Investors Lower Expectations As Rates Stay 'Lower For Longer' - Dexus

The realisation that interest rates and inflation may stay ‘lower for longer’ has profound implications for real estate investment, including that investors are reducing the level of returns they expect, according to

a new report from Dexus.

The report, the Australian Real Estate Quarterly Review, said Australian interest rates were expected to remain low for at least the next three years before normalising to levels which are low by historical standards.

"The ‘lower for longer’ environment is likely to support investment demand for real estate in the short term as investors seek secure income yields. Office yields, for example, are still at wide spreads to bond yields after both have fallen in recent years," the report said.

"Expected returns for real estate investments are likely to be lower than the experience of the past decade. This continues a long-running trend. For example valuation discount rates have stepped down by more than one percent each decade for the past 30 years, and it is now happening again."Peter Studley, DEXUS General Manager, Research said: “The investment climate is supportive of real estate values as we move into FY17.

“The global uncertainty we have seen this year emanating from China, Europe and the Middle East has served to highlight the attractiveness of Australian commercial real estate.

“Low interest rates are supporting investment demand for real estate as investors seek a relatively stable yield.

“The realisation that interest rates and inflation may stay ‘lower for longer’ means that investors are reducing the level of returns they expect from assets, including real estate.

“In addition, occupier demand for office and industrial buildings on the east coast, particularly NSW, is firming due to positive business conditions and solid employment growth.

“The result is that real estate is providing solid returns. A-REITs and unlisted property delivered total returns over the past year of 24.6% and 13.4% respectively.”