Interest rates may not affect yields much: JLL

Investors should not expect property yields to rise in the face of increasing interest rates, property consultants JLL say.

Tuesday, April 29th 2014, 12:00AM

by The Landlord

They say their research shows that property values are not always as clearly affected by interest rates as some might expect.

Andrew Brown, sales investment director at JLL, said interest rates and property yields were lagging economic indicators.

While there was solid economic momentum and limited supply there was nothing to force prices down and yields up, he said.

JLL’s head of research and consulting, Justin Kean, said that in June 2007, prime yields for office and industrial buildings were between 7% and 8%, as mortgage rates peaked at 10.8%.

“By mid-2011, property yields were back to 9% to 10% and interest rates had plummeted to below 6%. Data since 1990 suggests that yields and mortgage rates actually have a negative correlation, meaning they tend to move in opposite directions, rather than moving in the same direction, as conventional wisdom suggests.”

JLL said that as interest rates increased over the next two years, the downward trajectory of yields would continue for some time.

Brown said the cost of debt was just one factor that affected how much people would pay for a property. Others included location, the strategic nature of the site and the amount of debt they wanted to secure against the asset.

Kean said: “Next time you are starting around the water cooler… and someone proffers the opinion that interest rates are going to impact on commercial property pricing, know that like many rules of thumb in the property world, things couldn’t be further from the truth.”

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