After years of waffling over economic progress and devising reason after reason not to hike, Chairwoman of the Federal Reserve Janet Yellen is finally ready to pull the trigger.
Just two weeks ago, the market was putting a less than 1-in-4 chance of a hike. After Yellen had made her public speech, the tide had turned completely. As most investors, including us, agree, the United States will soon increase its short-term interest rates at a gradual pace.
Latest market pricing suggests that a March hike is likely, but the Federal Reserve is likely to be more conservative in their pace for additional hikes in 2017.
Of the major economies in the world, the United States stands out in the strength in their economic growth. Other economies, including those of United Kingdom, China, and Japan, are slowing down.
If global GDP growth is weaker than expected, the Federal Reserve will probably slow down the pace at which it increases interest rates. Furthermore, inflation pressures remain benign in the United State, and this reduces the need for the Federal Reserve to act quickly.
It is expected that after the March rate hike, the Federal Reserve will raise the interest rate in one to two more times within the year and the REIT markets have more than priced in a rate hike of this magnitude.
Outlook on Asian REITs Space
Admiral has always believed that in a rising rate environment, the key indicator for the REIT sector is whether rents are also rising. Because if rents are rising, the capital value will be protected. In fact, if the economy is doing well enough so that rents are rising faster, the capital value will also go up and this is what we have seen in 2003 – 2007 and many cycles before.
We see no difference in this cycle, and we expect economies currently in a rental upcycle to outperform. Since many Asian investors have grown accustomed to investigating real estate opportunities, investors may also achieve better results by looking at commercial real estate and REIT opportunities in neighbouring countries.
In Singapore, industrial and residential rents are falling. With Marina One, 5 Shenton Way and Frasers Tower set to complete this year, adding over 2.7 million square feet to the overall Singapore office market, rental increases are not likely.
Thus, relative to other economies, Singapore’s rental market is indeed weaker, and, incrementally, the capital value in Singapore is less protected when compared to other REIT markets in Asia Pacific.
That said, Singapore’s REITs have been trading at a discount to NAV for several years now, and this valuation gap provides some selected opportunities. Admiral continues to be an investor in Singapore REITs across many of our investment products.
On the other hand, the real estate cycles in other Asian countries are not in sync with Singapore. For example, Australia’s office market has just begun to see rental rises in 2016, as Australia’s mining sector contraction has led to rental falls from 2011 to 2015.
Up north, the retail and hotel markets in Hong Kong and Taiwan have improved from the significant pressure that started in 2015. Admiral believes that both Australia and Hong Kong markets have stronger fundamentals in commercial real estate than Singapore’s.
Even Japan is showing some initial signs of economic rebound, as we observed stronger than expected growth in exports in December and positive inflation in the last two months.
While it is still too early to tell whether Japan has entered another up cycle, we believe that the Japanese Yen is trading at an attractive level, and many Japanese REITs are trading at levels that assume rather conservative assumptions.
Admiral is always of a view that investors should diversify their real estate holdings by considering investing abroad. This is especially relevant for REITs, as exposure to multiple REIT markets will allow investors to profit from each market’s separate real estate cycles.
The differences in the supply-and-demand cycle diversify risks for investors and allow investors to enjoy a more stable investment return with a good cash yield.
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