A rising interest rate environment is usually a concern for real estate investors. However, worries over the direction of the benchmark 10-year US Treasury yield have faded as 2018 has progressed and the yield has settled at just above 3%. Although at some point the yield will rise again, its reluctance to do so in the near term has supported the views of those (including President Trump) who think that the Federal Reserve Bank needs to be less hawkish in terms of further rate rises.

Although Trump is on their side, the Doves are likely to be disappointed. GDP growth in the US looks likely to exceed 3% in 2018, well ahead of all other major markets. Growth is normally accompanied by inflation of some degree and this time is unlikely to be any different. Consequently, newly elected Fed Chairman Powell looks unlikely to heed the views of his President and rates are likely to rise at least once more before the end of 2018.

In an ideal world, rising bond yields will be consistent across the whole curve (i.e. affecting short and long dated bonds in equal measure). The recent flattening of the yield curve (short term rates moving up faster than long) was thought by some to be a precursor to an economic slowdown, even recession. Such fears have receded for now, however, and the prospect of better growth, a controlled programme of interest rate hikes and gently rising inflation have been supportive for the property market of late.

Although higher borrowing rates are not especially good news for REITs, costs can typically be offset by way of higher rental income streams which, in turn, can be justified if the markets or sectors in which properties are located are doing well. Hence, economic growth is more important to owners and tenants than the actual level of rates themselves. A good example of this is in Europe where negative rates should be hugely beneficial to property companies but where, in fact, many commercial REITs have been suffering because of weak tenant demand, particularly in troubled sectors like retail.

For an internationally invested vehicle like the Marriott International Real Estate Fund, currency is also a key consideration. Here again, a strong economy (US) is more likely to produce an appreciating currency than a weak one. Hence, it is not always about interest rates, even in the ratesensitive property sector.

In terms of activity, our strategy has been to continue moving assets away from the retail sector and into warehouses and logistic companies. Some shopping mall businesses are performing well, but in the UK especially, the number of retailers applying for Company Voluntary Administration (a form of bankruptcy protection) is increasing and having a big impact on retail mall owners.

Consequently, we have sold the remaining UK retailer in the portfolio (Hammerson) and replaced it with shares in Tritax Big Box, a young but fastgrowing warehouse owner and operator. We also bought shares in the Singaporean listed Ascendas REIT. Ascendas owns high quality warehouses and similar logistic-orientated properties in Singapore, Australia and the UK. It pays an excellent (6%) dividend yield and is in exactly the right place to benefit from the accelerating growth in e-commerce in Asia.