For the first time since 2006, the Federal Open Market Committee (FOMC) lifted interest rates in the United States this week. The 25-basis-point (bps) rise in the target federal funds rate was widely anticipated, so interest rates and real estate markets in Asia Pacific and the rest of the world should not be affected abruptly. Loft
The effect on property yields should be counterbalanced by the various rate cycles in which markets in Asia Pacific currently find themselves. There will be a gradual upward resetting of return expectations, which may be more tempered in the short term due to the anticipated move. However, if prices increase higher in the future, everything will work out. Markets with a bleak outlook for rental growth or contracting rents may be more vulnerable to yield softening as interest rates rise. In 2017 and beyond, yield expansion is more likely.
The Fed's rate hike this week, according to Dr. Henry Chin, Head of Research for CBRE Asia Pacific, would have the following effect on major Asian real estate markets:
Australia is a country that has a
There was a good linkage between Australian and US interest rate cycles prior to the GFC. Although the two have decoupled, CBRE Research believes that higher US prices, and the rate at which they grow, could place pressure on the AUD in 2017. The Reserve Bank of Australia will be pleased with this because a weaker currency will benefit tourism, non-resource exporter profits, and some manufacturing sectors. Higher rates in the United States would dampen any lingering hopes of a domestic rate cut, but CBRE Research continues to believe that Australia's official interest rates will remain unchanged for the majority of 2016.
Since the Fed's decision was widely expected and already factored into pricing, the effect on Australian yields would be largely neutral. Due to Australia's relatively higher yield and interest rate structure, which continues to draw substantial capital flows from offshore, there is still space for a little more compression in the short term.
China is a country that has a
The People's Bank of China (PBOC) has cut rates six times in the last year, and the rate hike in the United States would narrow the yield gap between the two countries even further. China is a country that has a 10-year government bond yields are currently 80 basis points higher than 10-year government bond yields in the United States. The rate hike in the United States is likely to fuel expectations of more RMB depreciation and restrict the PBOC's ability to cut interest rates further.
After the PBOC's foreign exchange reform in August 2015, China has seen an increase in capital outflows. Despite a large trade surplus announced in recent months, the country's foreign exchange reserves fell from a high of US$4.0 trillion in August 2014 to US$3.4 trillion in November 2015. The RMB, as well as China's capital reserves, are likely to be under more pressure as a result of the US rate hike.
In 2016, CBRE Research predicts a mild yield decompression across most asset classes (except logistics) and most cities. This is mostly due to worries about oversupply and domestic economic difficulties.
Hong Kong is a city in Hong Kong.
Interest rates are expected to rise gradually from their current ultra-low levels. As a result, the effect on real estate demand will be postponed until more significant hikes in 2016/2017.
The vacancy rate in all commercial property sectors is currently very low, which would help to reduce risks for landlords and investors, reducing the probability of a crash. Due to demand side factors that have arisen in recent years, retail is the lone exception. Rents will remain stable due to a scarcity of land, so capital prices will remain stable. With the exception of retail street shops, which would need to increase to justify the higher demand risks, yields will remain flat.
India is a country in South Asia.
Since January, the Reserve Bank of India (RBI) has cut rates four times for a total of 125 basis points. In November, however, inflation began to rise again, and the RBI is expected to hold rates unchanged in the near future. Any further increase would be contingent on commercial banks' ability to pass on lower rates to end consumers. The RBI has already prepared for the Fed's rate hike by increasing its foreign exchange reserves and being more cautious when it comes to easing.
The commercial real estate market is doing well, with vacancy rates decreasing in most industries and cities. In the long run, yields in New Delhi and Mumbai will stay flat or slightly compress, but this will be due to local factors rather than the US rate hike.
By the second half of 2016, inflation had remained below the Bank of Japan's goal of 2.0 percent, and the central bank is expected to continue its loose monetary policy, with the prospect of further easing. As a result of the rate hike in the United States, the yield differential between the two markets will widen, further weakening the Yen against the Dollar.
The funding climate is expected to remain favorable, resulting in more cap rate compression in the investment market. However, according to CBRE Research, this would primarily affect regional and/or alternative (i.e. non-office) asset groups.
Singapore is a city-state in Southeast
SIBOR rates are likely to be unaffected by the rate hike because the rise is minor and has already been factored in. However, given the declining occupier market, it will place even more pressure on capital prices. The yield spread is unlikely to narrow any further.
South Korea (South Korea)
On December 10th, the Bank of Korea's (BoK) monetary policy committee unanimously held the base interest rate at 1.50 percent for the sixth month in a row. The current low rate environment will most likely be maintained in the near term, and commercial real estate yields will remain at current levels.
The Bank of Korea has stated many times that it will not join the Fed in raising interest rates immediately. This is due to high household debt levels, as well as confusion regarding South Korea's economic fundamentals. If the Fed continues to raise interest rates, the BoK will be forced to follow suit. As this occurs, borrowing costs will rise, capital prices will fall, and yields will rise as a result.