Limited Direct Impact on China Property Market
January 2nd, 2014, Beijing —The U.S. Federal Reserve’s announcement that it will cut monthly purchases of mortgage-backed and treasury securities—to $75 billion from $85 billion, starting in January 2014—is likely to have positive implications for the Asia real estate market. Since the Federal Reserve’s summer announcement that it might begin tapering at some point in 2013, the market has been struck with uncertainty around when and how fast tapering might come, making business decisions difficult. However, Wednesday’s announcement can be perceived as business friendly, as it clarifies that rate and extent of tapering will both be moderate.
The benefits of the Fed’s announcement will be as follows:
• Provides more clarity around the Fed’s policy stance
• Highlights better economic prospects in US in 2014
• Frees up corporate decision-makers to implement plans for the coming year
CBRE maintains its view that the Asia Pacific region be the primary focus for global corporate expansion due to comparatively robust fundamentals of steady urbanization, rising wealth and favorable demographics. The impact on the China property market should be minimal given China’s current capital control policy and the fact that China property market is predominantly driven by domestic investors.
Asia Pacific
Overall, the clarity around the Fed’s announcement will allow firms to make business decisions that may have been on hold for the past few months. CBRE expects this to play out particularly in Asia in 2014 and eventually provide support to the rental market as firms seek to grow. There will be around a six to 12 months lag time before we see the impact on rentals from the improvement in business sentiment.
For capital markets, since bond yields have reacted mildly to tapering plans and the Fed expects to keep the Fed funds rate at zero for the foreseeable future, global interest rates are expected to stay low and future increases will likely be gradual and cautiously tied to the pace of recovery. Investors will remain keen on yield-accretive investment vehicles, which is positive for commercial real estate. Furthermore, investors will increasingly move up the risk spectrum in search for higher returns and shift their focus to secondary assets and non-gateway cities as yields on core assets in many parts of the world have compressed significantly.
Over the longer term the expectation is that U.S. interest rates rise will normalize, and this could exert upward pressure on interest rates for markets like Hong Kong and Singapore which rely heavily on foreign trade and have no capital flow restrictions—ultimately pushing up yield and return expectations on real estate investments. Property valuations in Asia could potentially be impacted by rising cap rates, but if improving fundamentals feed through into rising rents, this will partly offset the impact on property prices.
However, given the likely extension of the Fed’s zero rate, in Asia it appears that excess liquidity will continue to be the dominating factor in determining asset prices, at least in the coming 12 months. Property yields are therefore likely to remain low over this timeframe.
China
“The Fed tapering was well flagged to the market back in mid 2013. This should not be a surprise to the market,” said Frank Chen, Executive Director, Head of CBRE Research, China, “Furthermore, the magnitude of the tapering was milder than market expectation. Given China’s strict capital control policy and the fact that China property market is predominantly driven by domestic investors, CBRE believe the immediate impact on China’s property market should be minimal.”
“The tapering signaled the Fed’s confidence in the underlying strength of the US economy and a better economic prospect for 2014. Over the long term, the improving external environment bodes well for the China export sector, which will support domestic GDP growth. A stronger economic growth will in turn lead to stronger office demand and investment demand,” Frank added.
About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (in terms of 2014 revenue). The Company has more than 70,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 400 offices (excluding affiliates) worldwide. CBRE offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. Please visit our website at www.cbre.com.
