Matthew Mowell and Bill Pekowitz, Real Estate investment analysts (US) at Standard Life Investments provide a detailed research on the relationship between a rate hike and the performance of real estate as asset class.
The authors argue that historical evidence shows real estate delivers a positive total return in periods of economic growth. Assuming that performance is a function of underlying economic activity, they assess how the asset class will perform against the current backdrop. The authors analyse both direct real estate and listed REITs.
They conclude that while there are some commonalities, particularly with the 2004-2006 tightening cycle, there are unique current characteristics investors must consider. Higher interest rates could pose a threat to listed and direct real estate valuations in the short term given increased uncertainty. However, they argue that over the medium term, commercial real estate should continue to post competitive returns versus other asset classes.