Higher discount rates mean lower returns for global CRE

Long-term forward rates have risen markedly in the US, eurozone, and UK over the past year, and now stand well above pre-pandemic (2015-2019) averages.

What you will learn:

• Higher neutral rates would present a challenging environment for underwriting long-duration investments such as commercial real estate (CRE).
• We estimate that commercial real estate present values are now 8%-12% lower compared to the pre-pandemic period for the eurozone, UK, and US, when comparing 10-year forward rates and future rental growth.
• While we expect that advanced economy policy rates will peak this year as supply-chain bottlenecks ease and inflation recedes, it’s likely that the rise in inflation expectations will be with us for some time, due to higher inflation volatility and the experience from the recent inflationary episode.
• Therefore, we believe that the neutral level of nominal rates in the coming years will be higher than the pre-pandemic lows, albeit still below levels in the pre-global financial crisis period – this is because the key forces behind the long-term decline in neutral real rates (productivity, demographics, global capital flows) are still in play.