NEW YORK — Even with rising interest rates and falling returns, U.S. institutional investors are expected to hang on to their real estate investments in the next 12 months, according to ING Clarion Partners, a New York-based real estate investment firm.
"A low interest rate environment has been critical in channeling capital towards real estate, providing pricing support and keeping yields firm during a period of weak property fundamentals," wrote Will McIntosh, author of the firm's "U.S. View, Research and Strategy" report. "As interest rates rise, will capital recycle away from real estate and lead to an increase in yields?"
Real estate executives at ING Clarion contend that rising rates will not lead to an exodus from real estate by institutional investors. Their reasoning is that short-term interest rates are unrelated to the cost of real estate borrowing, and long-term interest rates are expected to rise gradually. What's more, institutional investors still have real estate allocations that have not been invested, Mr. McIntosh said.
Highly leveraged individual investors might take their money elsewhere. Private buyers accounted for 52% of all transactions in the first half of 2004, down slightly from 55% in the first half of 2003, stated the report, quoting statistics from Real Capital Analytics Inc., New York.