A.     They go up: Rising rates often go hand in hand with an improving economy.

     B.     They go down: Rising rates reduce the present value of future cash flows.

     C.     It depends: No clear pattern, and the relationship varies from country to country.

     D.     No change: REIT valuations primarily are a function of supply and demand.

In reality, there is some truth—and fiction—in all of these answers, according to a recent report, “Global Property Compass: Interest Rates in Focus,” from Morgan Stanley Research.

Conventional wisdom suggests that rising interest rates spell trouble for real-estate valuations. Yet, historically, the correlation between real-estate valuations, interest rates and performance for US REITs, at least, has been relatively low. Whether this correlation is positive or negative, moreover, depends on the bigger economic picture. Finally, interest rates are just one of many factors that influence valuations. (See “The Connection Between Interest Rates and Capitalization Rates.")

To be sure, this adds complexity to this asset class—especially in the face of divergent interest-rate outlooks around the world—but it also opens doors for investors who understand the nuance of each market.

Six Cycles of Rising Rates

This isn't to say that real-estate investors won't initially feel the pinch of rising rates in some places. The MSCI US REIT Index (RMZ), for example, has lagged the broader market this year in anticipation of a Federal Reserve rate increase later this year.

To better understand the relationship—or lack thereof—between rates and real-estate values, the Morgan Stanley Global Property team analyzed the performance of US REITs over six cycles of rising rates, going back to the 1970s.

The upshot: US REITs outperformed in three of the past six periods of materially rising rates.

The 2004 to 2006 cycle was the most relevant for the US market. Much like today, strong fundamentals, and balanced supply and demand characterized that cycle. Rates were poised to rise gradually, credit was readily available, and a glut in global savings drove capital to the market. During that period, REITs outperformed the S&P 500 by 40 percentage points.

“Selectivity Is Key”

To be sure, investors can't necessarily expect the same results this time around. A decade ago, REITs were just beginning to gain wider acceptance as an asset class. Real estate has since been widely embraced by investors. And while the RMZ is down this year, it's enjoyed a nice run: up more than 270% since the market lows of 2009.

Nevertheless, rising rates are by no means a death knell for property stocks.

"Selectivity is key," says Haendel St. Juste, who covers REITs for Morgan Stanley Research and is lead analyst of the report. The best opportunity for growth at a reasonable price, he says, is in industrial, retail and, to a lesser degree, apartments and healthcare. Investors in US real estate should also be choosy about location. While secondary markets seem to offer better values, over time core investors have done best focusing on primary markets.

Patchwork of Global Patterns

Perhaps more than any asset, real estate behaves differently from one country to the next.

In the UK, notably, rising interest rates have historically corresponded with property stock outperformance. “Investors in UK property stocks should embrace higher rates," says Bart Gysens, who covers the pan-European property sector. “In absolute terms, UK property stocks tend to go up most of the time and, on average, by double digits in the 12 months after interest rates start rising."

Meanwhile, in Australia, where the 10-year government bond is expected to increase in the coming year, rising rates can work against real-estate investors, according to Lou Pirenc, who covers the Australian property industry. Nevertheless, growing interest in alternative assets, improving fundamentals and strong demand bode well for some sectors, including office and retail.

Real estate has outperformed during recent periods of rising rates in India; blame it on inflation. Now, rates are likely to decline in the year ahead, but that could work in real estate's favor. At the same time developers can refinance their debt, long-term trends of urbanization, rising wages and corporate expansion drive demand for new housing.

The same can't be said for China, where any benefit from declining rates—five rate cuts since November, 2014—may be offset by less favorable demographics. “Due to the one-child policy implemented 30 years ago, we expect a declining number of household formations," says John Lam, head of China property research. “Together with a slower urbanization rate than in the past, we expect demand to slow structurally in the next decade."

For more Morgan Stanley Research on the outlook for global real estate as interest rates in key markets seem set to rise, ask your Morgan Stanley representative or a Financial Advisor for the full report, “Global Property Compass: Interest Rates in Focus" (Jul 27, 2015). Plus, more of our latest ideas.