Bond rate trends and their impact on the relationship with real estate yields

In the last year many financial markets have continued to show a downward trend in government bond rates. In some markets like Switzerland 10 year rates have been posting negative yields. The relationship between bond yields and commercial real estate pricing is a well-known one. The impact of changes in the so called ‘risk free rate’ on property yields, given their large income component, is understandable. So what is the implication for real estate yields if bond rates move negative on a wider scale? More importantly what is the implication of continued downward pressures generally within financial markets on the value of real estate? This paper examines the signals being sent from the bond markets concerning long term pricing of prime and secondary assets and considers what relationship remains with real estate as bonds move to ultra-low levels. Having broken down the signals it examines the statistical relationship, and considers whether there is evidence of statistical breaks as extreme points occur within the financial markets.