After many months of waiting, cracks have started to appear in the US Government Bond market. In September, the yield on the 10 year benchmark Treasury bond rose by around 25 basis points in reaction to recent comments from the US central bank about the likely future path of short term interest rates. In reality, the Fed said nothing new. Markets have been expecting a rise in rates for a while now and it was really only a matter of time before something happened. Nonetheless, September 2014 may come to be seen as the turning point in the long Treasury bull market run. From here, interest and bond rates may start a slow but steady ascent to levels consistent with steady economic growth and below trend inflation.

This matters to property markets because the cost of securing new borrowing rises when interest rates move higher. To some extent, major REITs (property companies) are shielded from short term rate moves because they tend to be locked into more sophisticated longer term financing programmes. Furthermore, higher rates are typically consistent with improved economic growth which is good for commercial property values. Landlords can also increase rents to compensate for the higher cost of borrowing. Nonetheless, the short term shock produced by the turn in the Treasury market has had a knock on effect on REIT share prices which were down, globally, by 6.1% in Dollar terms in September and by 3.8% over the quarter. Prior to this point, property shares had been tracking higher in line with accelerating GDP growth figures and the anticipation of stable income streams both now and in future years.

In local currency terms, the US was one of the worst performing markets in September with the REIT Index down by 6.4%. The UK and Europe performed better (-2.5% and -2.1% respectively) but the weakness of sterling and the euro sapped performance when translated into US Dollars, albeit they were still some way ahead of the returns from the US market.

We expect calm to return to markets once the resetting of Treasury yields has been absorbed fully by investors. As such, we are treating this as an opportunity to add to some of our holdings, especially in the US, where yields are once again looking interesting. Forecast dividend payments are either stable or mildly increasing, especially in the UK reflecting strong capital values which are slowly starting to creep outwards from central London and into other parts of the UK. Only Europe, where we are notably underweight, remains mired in difficult terrain with deflation an ongoing theme as well as likely Euro devaluation and negative nominal interest rates persisting well into 2015 and maybe beyond.

We do not expect interest rates to rise strongly, nor do we expect GDP growth in the US and UK to abruptly end, despite stubbornly low wage inflation and the impending end of quantitative easing in the US. Whilst the wider market in the US is touching new highs, property prices are still some way from the levels last seen in 2008. Before they recapture these heights, investors need further assurance that dividend growth is sustainable and, to do this, interest rates will need to stabilise. We anticipate both events occurring in 2015/6 and will continue to lock in yields at attractive levels whenever the market permits.

Property shares, measured by the MSCI Global REIT index, consolidated their recent gains with a rise of 7.2% in the second quarter of 2014. This lifted the gain, year-to-date, to 13.6%, well ahead of the broader equity indices in all major markets. The Marriott International Real Estate Fund tracked this gain with a year-to-date rise of 13.5%.

It is noteworthy that, against general expectations, bond (fixed interest) markets have also been strong in 2014, despite the threat of higher interest rates and the ongoing tapering of quantitative easing in the US. Neither event is especially supportive to property shares, but investors are still hungry for yield. Interest rate hikes, when they do arrive, are likely to be in 0.25% incremental shifts and phased in over a period of time, maybe even years. Base rates are, therefore, likely to remain below historic averages for the foreseeable future and so it is the sentiment of the upward move in rates rather than the actual cost to businesses which is likely to influence investors over the months ahead.

Whilst the US has remained reasonably constant in guiding the market towards a likely rate hike in 2015, newly elected Governor of the Bank of England, Mark Carney, has sent out mixed messages, leading a member of the UK's Treasury Select Committee, Pat McFadden, to describe him as an 'unreliable boyfriend'. Mr McFadden has a daughter and 6 siblings, so presumably speaks from experience. The point is that no one knows for sure when the Bank of England intends to make its first move. Autumn 2014 seems the most likely date, but we still wonder whether or not a rate hike will happen this side of the 2015 UK General Elections. The decision may yet be impacted by the referendum on an independent Scotland due in September but, in truth, nobody knows, not even the Governor. Either way, property markets have treated all of the vapidity with indifference. It should come as no surprise when rates do start to move higher and that, perhaps, is the point of the whole exercise.

On the corporate front, the news is rather more interesting. The shareholder spat over the division of the Westfield Group into two parts has been finally resolved. Westfield will now own shopping malls in the US and Europe whilst the Australasian properties will be held in a new company (Scentre Group). We remain long term holders of the Westfield Group but the initial attitude of the Westfield management towards dissenting minority shareholders has not been the best example of good corporate governance. Elsewhere, Land Securities have bought a 30% stake in the Bluewater shopping centre in Kent from rival Australian property developer Lend Lease Corporation. Lend Lease have made a significant profit from this investment and it is a surprise that Land Securities have chosen to buy in at this stage of the cycle for an estimated yield of 4.1%. However, Bluewater has potential for rental growth and Land Securities are leading experts in this area. We are long term holders of Land Securities whose management team has an impressive track record. We would not bet against them.

The immediate outlook for property markets will be determined above all by interest rates. It may, however, also be driven by the ongoing search for portfolio diversification. With this in mind, Norway's $887bn state pension fund has announced that it is looking to boost its investment in real estate markets. Norges Investment Bank (their investment manager) plans to increase real estate exposure in the fund by 1% every year through to 2016. Such a move would take property up to 5% of its total portfolio, from just 1.2% last year, with the emphasis on London and Paris (Europe) and New York, Washington, Boston and San Francisco (US) - e.g. "prime" locations; a very similar macro strategy to our own.

Property shares generally underperformed a falling equity market in the first quarter of 2014. Technically, there was no good reason behind this other than that the events unfolding in Crimea meant that this was generally a 'risk off' quarter and the smaller average capitalisation size of property shares as an asset class meant that the downside reaction was exaggerated.

Investors are, however, still concerned about the impact of higher rates on the sector. Newly installed Fed chairman Janet Yellen did little to dispel the uncertainty earlier in the month but we remain of the view that when it happens, rates will be raised in a controlled and steady manner. Once markets have adapted to the early realisation that the theoretical has turned into the practical, then we expect the sector reaction to eventually turn positive, much like the reaction to the end of Quantitative Easing in the US.

Otherwise, results from major property REITS continue to trickle down in a positive manner with few shocks, befitting to a market now well into recovery mode. As before, the UK looks to be the brightest star with London centric companies firing on all cylinders. The London effect will gradually ripple upwards and westwards into the rest of the UK, maybe even in time for the 2015 general election but probably too late for the Scottish vote. The US too remains in a steady holding pattern, as does Europe, albeit thanks to an entirely different set of circumstances. Only emerging markets, where we have minimal exposure, remain steadfastly in the doldrums with the events in Ukraine unlikely to change investors' mind sets any time soon.

There have been minimal changes made to the fund during the quarter. Results have been generally in line with expectations and we have seen dividend increases across the board, albeit still not at the rate which we became used to prior to the 2008 banking crisis. Whilst the US and UK are in a pattern of accelerating growth, in Europe the recovery situation remains very patchy. Given the domestic nature of the property market, we remain extremely selective in this area with investments confined to carefully chosen Swedish and German property companies in specific areas of interest and a single French company, Unibail Rodamco, whose track record during and after the banking crisis has been exemplary.

Property shares have had a disappointing year relative to the wider equity market. The cause has been the performance of bond markets where yields have risen in anticipation of the tapering of Quantitative Easing. In theory, this pushes up borrowing costs for real estate businesses and puts pressure on rental yields which are often set with reference to prevailing government bond yields. In the US, the benchmark 10 year government bond yield is hovering below 3% having been as low as 1.6% before tapering talk prompted panic back in May. This yield is likely to breach 3% as 2014 progresses but with economic growth still quite fragile, we do not expect short term rates to rise anytime soon and expect yields to settle at or close to current levels.

The International Real Estate Fund rose by 4.6% in 2013 including dividends. US and Canadian REITs were generally lacklustre throughout most of the year but our focus on direct retail and office markets in prime city locations meant that we broadly avoided the fallout from higher bond yields. Most of the growth in the Fund came from our UK holdings where the London property market continues to perform exceptionally well. Here, whilst there is some talk of a bubble, this is predominately in the new build apartment sub-sector of the London residential market where prices do look racy. Elsewhere, we see scope for NAV increases in 2014 as development projects come on stream and capital is recycled as completed projects are sold on. Vacancy rates remain very low in most sub-sectors and dividend projections show modest increases in 2014.

The International Real Estate Fund has a very low exposure to emerging markets and, hence, has avoided all of the turmoil earlier in the year in these markets. The emphasis remains firmly on capturing income from rental yield in major markets supplemented, over time, by capital growth. Whilst a rising yield environment is not the best backdrop for this sector, economic growth is actually of far greater consequence in the medium term provided that gearing is under control and cash flow is secure. As a result, we believe that the fund is exceptionally well placed to participate in what appears to be the start of a protracted period of growth in developed markets.