By Art Patnaude

Commercial property has been a big winner from years of ultralow interest rates around the world.

Now markets are signaling that change might be in the air.

Investors have been dumping government bonds in Europe, Asia and the U.S., sending prices tumbling. When bond prices fall, real-estate values often follow.

The commercial real-estate boom of the past few years has been driven by global investors seeking out returns better than those found in low-yielding bonds. But that dynamic could start reversing, analysts said, as ultrasafe government bonds start to offer yields that make commercial property look less desirable in comparison, given the potential risks.

Bonds have sold off beyond the U.S. because investors think U.S. President-elect Donald Trump's plans to spend on infrastructure might lead the Federal Reserve to raise interest rates more aggressively than expected, which in turn could ripple through to other central banks. While the selloff has been greatest in the U.S., government bond prices are down sharply across the world. Eventually, that could impact property.

To be sure, interest rates and bond yields remain extremely low. The Bank of England lowered its benchmark rate in August to 0.25% -- the lowest in its 322-year history -- from 0.5%, where it had been since 2009. The German 10-year bond is yielding 0.3%, up from negative territory earlier this year, but still well below the nearly 2% yield from three years ago.

At the moment, property chiefs and analysts stop short of predicting a sudden global decline in property values. But concerns have been growing.

"There is a danger in real-estate markets that, because of lower-for-longer policies...values have not been driven by fundamentals, " said Chris Taylor, chief executive at the property arm of Hermes Investment Management, the London-based asset-management firm. Mr. Trump's new policy proposals "bring into sharper focus what's been driving real-estate markets."

Well before Mr. Trump's victory, worries were mounting that some corners of the global property market were overheating. Office values in London and Hong Kong, as well as New York, Los Angeles and Chicago, are above the peaks hit before the 2008 financial crisis on a price-per-square-foot basis, according to property data firm Real Capital Analytics.

But for investors, it is all relative. Despite soaring prices, demand has been strong because of the gap between returns on bonds and property. In the eurozone, commercial property is yielding about 4.5%, while yields on 10-year government bonds are in negative territory, according to property broker Cushman & Wakefield.

For real estate, "no one questions the current attractiveness of these yields given the alternatives," said Joe Valente, head of real-estate research at J.P. Morgan Asset Management. "But how resilient are these pricing levels? I'd like to see a bit more of a cushion."

Private-equity global funds have been large net sellers of commercial real estate this year, unloading $19 billion more in property assets than they bought in the first nine months of 2016, with the Americas region "bearing the brunt of that trading activity," according to a report from broker JLL.

But investors from Asia and the Middle East were still buyers, the JLL report said.

While some European investors think their region looks expensive, Asian institutional investors still see value in property, said David Hutchings,head of European investment strategy at Cushman & Wakefield.

Nervousness among European investors "is seen as an opportunity," Mr. Hutchings said.

Investors have previously predicted turning points for government bond markets that didn't come to pass. In 2015, yields on 10-year German bonds moved sharply higher but headed lower later in the year.

If Mr. Trump's proposed policies don't materialize, bond markets could return to levels seen earlier this year, analysts said.

"Everybody is looking at the same math," said Mark Gabbay, CEO of the Asia Pacific region at Chicago-based LaSalle Investment Management.

"Interest rates are low. You can't sit on bonds. You can't sit on cash," Mr. Gabbay said. As long as interest rates remain low, "the money train continues."

Write to Art Patnaude at art.patnaude@wsj.com

(END) Dow Jones Newswires

November 22, 2016 05:44 ET (10:44 GMT)

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