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UK interest rates are expected to rise gradually over the next three years, in tandem with the economic recovery.
Prime property shows a relatively weak correlation with gilt yields and base rates, whilst average property displays a moderate positive relationship.
Broad fundamentals are supportive for real estate – an improving economy, expected rental growth, limited supply and a historically high yield spread versus gilts.
Potentially least sensitive to rate hikes: prime office and retail.
Potentially most sensitive to rate hikes: secondary retail.
Biggest risks for UK real estate: sharp and unexpected interest rate hikes; weaker than expected occupier market and rental growth.
Source : M&G Real Estate