Real estate performs well in a rising interest-rate environment, according to research by Timbercreek.Lim Yong Hian
Globe editors have posted this research report with permission of Timbercreek Asset Management. This should not be construed as an endorsement of the report's recommendations. For more on The Globe's disclaimers please read here. The following is excerpted from the report:
With two key Bank of Canada interest rate hikes the last few months, financial advisers may be starting to get concern about how to approach portfolio construction in this new environment.
The sentiment among many seems to be that higher interest rates are detrimental to real estate investments. Intuition tells us that as interest rates rise, the cost of capital also increases, which would negatively affect cap rates (the dominant factor when evaluating real estate) such that cap rates would rise in lock-step with interest rates. What this entire premise fails to consider is the positive impact that growing cash flows have on real estate stemming from a strengthening economy, which is often the backdrop for rising interest rates.
Our research suggests that over the long term, real estate performs well in a rising interest-rate environment, despite popular belief.
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