In this Q&A, Paul Stewart, Head of European Real Estate Research & Strategy, discusses how investors in the asset class can allocate capital in an uncertain interest rate environment, while facing potential headwinds such as Brexit and the threat of trade wars.
How long can investors rely on low interest rates and inflation when it comes to future-proofing their real estate investments?
Today’s financial climate is not necessarily the consequence of extraordinary monetary policy and the associated debt overhang following the financial crisis—the decline in global interest rates is actually a trend that can be traced back to the 1980s. The developed world now has a low dependency ratio (large workforce relative to children and retirees), which generates an excess of demand for savings over the supply of suitable investment assets. Moreover, inflation is being suppressed by a large workforce competing for a finite supply of jobs, bidding down wages. These interest rates mean lower risk-free rates and thus property yields have fallen to record lows.
However, with baby boomers now nearing retirement, concerns are emerging that the above process is about to switch into reverse. While the ageing of the population is inevitable, the precise timing of their retirement (and thus fall in the saving ratio and rise in dependence ratio) may not be. Key to this is technological change, especially in healthcare, which will increase not just overall longevity, but also productive years in later life. Although politically controversial, given the sheer weight of numbers of baby boomers, the fiscal burden on the national healthcare is such that retirement ages are likely to trend upward. Paradoxically, delayed retirement is also proven to be more likely for those at the top end of the income spectrum, those who actually do the bulk of saving.