The Trump trade that matters most for property

Yields soared in the wake of the pandemic as short-term interest rates were raised to tame inflation. But higher bond yields hurt valuations of other assets, especially real estate, which are typically priced at a margin to the risk-free return from government notes.

Since Trump’s election, 10-year US bond yields have fallen from a high of around 4.8 per cent to below 4.2 per cent this week. The defensive buy-up of bonds – pushing yields lower as a result – was given fresh stimulus this week as concerns over a “Trumpcession” gained traction across the market, amid concern over the impact of trade tariffs and reduced US government spending.

At Heitman, a property investment platform with around $78 billion under management, its chief executive Maury Tognarelli was keeping a watchful eye on bond yields during a whirlwind tour of Australia, packing in 20 client meetings in just four days this month.

Tognarelli acknowledges the recent fall in bond yields is “because the market is concerned about growth” but says that it’s too soon to tell whether the Trump agenda will reduce yields for the right reasons.

The “intended outcome” of those policies is to address the “structural issues which were driving the long end of the curve or [yields on] the 10-year note higher”, including large government deficits and public spending. Restraint on that front, combined with deregulation, would be as effective as tax cuts, he said.

“The combination of those two elements will spur economic growth, or reignite growth. And then the long end of the curve can settle because the risks have been addressed,” Tognarelli told The Australian Financial Review during his visit this month.

“I place a lot of weight in the philosophical objectives of the new administration. They are addressing the most significant issues – that’s not a comment on their approach or their style. They are attacking the issues that are important to bringing into balance both the macroeconomic environment as well as the capital markets’ environment.

“That, combined with an effort to bring the geopolitical conflicts into a state of detente, are equally important to allowing the world and its various economies to begin to build.”

Since Tognarelli spoke with the Financial Review, the US 10-year bond yield rose before dropping lower this week, a reminder of how volatile pricing has become as the market weighs the implications of Trump’s rapid-fire intervention on tariffs, geopolitical conflict and government cost-cutting.

“I am of the mind and in the camp of being optimistic about the likelihood that these steps, as well as the steps being taken across the world, will create a better economic environment, will lower geopolitical risk, and will allow inflation to be tempered at levels that allow the relationships between short-term monetary policy and interest rates and longer-term interest rates to be appropriate. And that’s a positive for property,” Tognarelli said.

And while the underlying demand for most forms of commercial real estate – except perhaps office space – is rebounding, it is the bond rate that remains critical to property valuations. Real estate is sometimes dubbed a bond proxy, so closely is its pricing linked to the risk-free rate.

Lower US bond rates are good for the valuations of all risk assets, including property, according to Tognarelli.

“That is the instrument, as well as other nations’ 10-year government bonds, those instruments are the key variable for risk asset pricing across the globe,” he said.

Along with the bond yield curve, it’s also the vibe that’s important too and Tognarelli said the incredible momentum of early days of the new administration has been a tonic for sentiment.

“The new administration has clearly sparked energy within the country itself. That’s displaying itself through people in all professions, in all industries, starting to emerge from the last three years of post-COVID conditions and beginning to think about a future that’s far more advantageous. And they want to participate in that.”

Heitman has around $7.4 billion through 14 mandates from Australian investors that it invests across the US, Europe and increasingly into the region, including Japan. Inbound, it has around $666 million invested into Australia.

The turning of the cycle for commercial real estate, along with the longer-term growth aspirations, is “constructive” for property investment, including in Australia, according to Tognarelli and Beau Titchkosky, Heitman’s regional managing director of client service and marketing.

But the Heitman executives will also be hoping to steward more outbound investment too as Australia’s major super funds and institutions search for global exposure.

“Local superannuation funds are now starting to outgrow the domestic market here,” Titchkosky said.

Those comments come just a week after federal Treasurer Jim Chalmers joined a roadshow of some of Australia’s biggest super funds in the US to promote the power of the savings and potential to invest in the United States.