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AFIRE: Interest rate hikes likely to trigger next US downturn

Foreign investors in the industry trade body’s annual survey also said that the US office sector will be the most affected by any interest rate increases.

An interest rate increase is the economic event most likely to cause a downturn in the US property market, according to a majority of the members of the Association of Foreign Investors in Real Estate (AFIRE).

More than 40 percent of the survey’s investor respondents polled on the likelihood of risks which would cause a real estate downturn expected interest rates to be the trigger, and a further 48 percent said it was a possibility.

Last month, the US Federal Open Market Commission set the updated target range for the federal funds rate at 0.25 percent to 0.5 percent, up from zero to 0.25 percent. By the end of next year, the rate is forecasted to be 1.375 percent, based on the median number from 17 policymakers.

Foreign institutional investors, who have looked to the US as a real estate investment haven, said in the AFIRE survey that office properties would be most affected by an increase in interest rates and warehouses would be least affected.

“They’re concerned that the rise in interest rates will trigger a rise in cap rates,” Jim Fetgatter, AFIRE’s chief executive officer, told PERE. “Cap rates on office tend to be slightly more volatile than other products and it may affect corporations.”

A majority of survey respondents predicted hotel cap rates will increase by the end of the year, while about 40 percent said office cap rates will increase slightly. Fetgatter said he was surprised by the overwhelming number of respondents who said rising interest rates could trigger a downturn because investors have long anticipated the hike.

Just behind an interest rate increase, survey respondents were most concerned about China’s economy. About a third of those surveyed said a Chinese slowdown is likely.

On the other hand, foreign investors expressed confidence in the overall market outlook: Nearly 80 percent said that a decline in domestic investment is unlikely.

Investors are planning to act on this optimistic outlook: The majority of foreign investors expect to invest more in US property in 2016 than they did last year, according to the survey. New York remains the top global target for cross-border investment.

About half of the group’s roughly 200 members participated in the annual survey.