Although rising interest rates have a direct impact on mortgage rates and the affordability of house prices, the impact on commercial property is different. First, property companies are not as highly geared as home owners. Their loan to value ratio is on average around 50%. Second, companies tend to limit their exposure to rising rates through fixing or capping. Third, assuming that rising interest rates are the result of strong economic growth and rising inflation, the negative impact tends to be offset by an increase in rental income.

Right now, we are seeing a very large disconnect between property share prices and property value (NAV). General investors (who comprise of up to 80% of the stock market) are taking profits and rotating out of property into other sectors of the market for which they believe can offer higher returns within a shorter period. At the same time, we are also seeing hedge funds shorting the market, amplifying the effect of the initial sell-off.

A similar situation occurred in 1999/2000 when everyone was selling property shares to buy technology stocks. In the wake of the technology bust and 9/11 office markets were weak, and investors only began buying property in 2003, when the impact of recovering office markets, low interest rates and the advent of REITs began to reprice the sector.

At this stage, we believe that the fundamentals of the property market remain intact. Within the European property clock, the most important areas of the market are the London City and Paris office sectors (we envisage rental growth acceleration to continue for the next 2 to 3 years). This is as a result of increasing demand with limited supply.

From valuation standpoint, UK property share is trading at a 20% discount, with large cap companies such as British Land and Land Securities now trading at around 30% discount to NAV.

If you know the "tortoise and hare" story, we liken the tortoise to the property market and the hare to the equity market. Just as in the fable, the tortoise (property market) plods along slowly but surely, while the hare (equity market) often runs around in circles, gets lost at times and goes to sleep once in a while. At this juncture, the property market keeps up a steady pace? while the stockmarket investor takes a rest! We hope to reassure investors that the vast majority of our portfolios is built around potential income producing property with robust finance. We are sticking to fundamentals of the underlying property markets, which remain robust!

Source: Henderson Global Investors