|Riding the Wave: How Long Will it Last?
The current real estate cycle will inevitably come to an end, but despite its length – well into its eighth year – and uncertainties following the Brexit vote, the economic news remains encouraging throughout Europe. The wave is continuing as investors in all the markets surveyed by Situs RERC reported that plenty of cash is still available for investment. They attribute this at least in part to the ECB’s decision to keep interest rates low and continue QE – a decision it reiterated in September.The ECB is faced with a conundrum. Despite years of near-0 percent rates and QE stimulus, the Eurozone is not showing signs of a significant economic pick-up. In particular, inflation remains stubbornly low (1.3 percent compared to the 2 percent target). This puts the ECB in a tight spot to continue the stimulus despite the risks building up with an ever-increasing ECB balance sheet. From afar the situation looks far more positive, with unemployment falling to long-term lows and the overall economic outlook being healthier than some years back. The nature of the EU means that various markets face different challenges, so the positives of low interest rates and QE are far more necessary for some than others. Low interest rates and QE appear to be the new normal, for now.Apart from the US, there is no historical parallel for QE and low interest rates lasting so long, which makes it harder to figure out how long investors will be able to ride the wave. The ECB has been injecting money into the system through QE, essentially extending unlimited amounts of cash to banks. Interest rates have been so low for such a long time that the markets have become anesthetized to how easy it is to borrow money. The QE program is expected to continue at least through 2019, but Mario Draghi, ECB’s president, has announced that he will extend the program beyond then, if necessary. In the wake of the recession, the economy needed QE to recover, but investors have become addicted to the easy access to money. Now QE is being pumped into an already robust system and is manipulating the markets.
On the other hand, extremely low interest rates have been a boon for CRE. The unprecedented bull run in European CRE has been due largely to central bank liquidity. The low rates have a direct link to taking on more debt, which in turn raises property prices. Despite all this money pumping into the economy, inflation remains stubbornly low, likely because of investor uncertainty. In uncertain times, demand for real estate increases.
read the full story in the Situs RERC European Report.
Here’s What the Fed Unwind Means for Currencies of Emerging Markets
While dollar bulls are cheering the Federal Reserve’s decision to begin winding down its balance sheet, emerging-market investors should buckle up for a bumpy ride.
The Fed’s huge asset purchasing program, which was central to its quantitative easing strategy in the aftermath of the financial crisis, helped push down yields on developed market bonds, sending yield-hungry investors into the arms of emerging markets.
In September, the U.S. central bank announced it would begin to gradually unwind its $4.5 billion balance sheet starting this month, and that could change the dynamic.
While the exact effects of the unwind remain the subject of fierce debate, “you could argue that the unwinding of the Fed could mean higher yields and a stronger dollar,” said Jonathan Davies, head of currency strategy for UBS Asset Management’s investment solutions team.
“If Treasurys offer halfway decent returns again, people might well reallocate their assets [to the U.S.],” Davies continued. “On balance, the effect remains to be seen, but there is a potential negative effect on global risk assets.”
read more: MarketWatch
Investors Pile into Real Estate in Emerging Markets
Investors are showing more interest in commercial real estate in Asia, South America and other emerging markets, where growth trends and the lure of outsize returns overshadow the additional political and financial risks these regions can pose.
From 2012 to 2016, investors mostly were fleeing markets like Brazil, Russia and India as those countries were hit by political turmoil, weak growth and shaky values. But in the last 18 months, some of the biggest names in real-estate investing have become more bullish on emerging markets as growth has picked up and some governments implement reforms.
In India alone, private-equity firms are expected to acquire a record $4.2 billion in real-estate assets this year, according to Knight Frank Research. Recent big deals include Singapore’s sovereign-wealth fund, GIC Pte Ltd, which agreed in August to buy a $1.4 billion stake in one of India’s biggest real-estate developers, DLF Ltd.
Investors looking for deals in India also include Blackstone Group, KKR & Co. and Brookfield Property Partners, according to people familiar with the matter. Brookfield is about to close its $1 billion purchase of the office and retail space in a sprawling master-planned community in the Powai suburb of Mumbai from its developer, Hiranandani Group.
read more: WSJ
Property Investors Bet on Mall Culture in Emerging Markets
Retail development in the U.S. has slowed to a crawl as consumers switch to online shopping. But in emerging markets it is a different story.
Development pipelines are packed with shopping centers, outlet malls and other retail properties in such countries as India, China, Malaysia, Indonesia and Colombia.
Indeed, retail is one of the most attractive property types in emerging markets for international investors who are showing more interest in these markets now that growth rates are increasing and many governments are implementing structural reforms.
For example, private-equity giant KKR late last year joined Hong Kong-listed Sino-Ocean Group Holding Ltd. to make a $190 million investment in Beijing Capital Juda Ltd., a leading Chinese retail outlet developer. Juda has four existing outlet centers and another seven in the pipeline, according to Ralph Rosenberg, head of KKR real estate.
In Indonesia’s capital Jakarta, three malls have opened this year while another trio are set to do so by December’s end, according to real estate services firm Cushman & Wakefield.
read more: WSJ
Damage from US Hurricanes to Blur Today’s September Jobs Report
Damage from two catastrophic hurricanes means that the government’s September jobs report being released (Friday) today will provide a blurrier-than-usual snapshot of the economy.
With Harvey and Irma having inflicted destruction on Florida, Texas and other parts of the Southeast, thousands of businesses had to shut their doors and left many people temporarily out of work. Yet the decline in employment should be short-lived. A hiring rebound is expected for October or November.
The likely tepid job gain in the government’s September jobs figures was foreshadowed by a report Wednesday from ADP, a payroll processor. ADP said its monthly survey showed that private businesses added 135,000 jobs last month, far fewer than the 228,000 added in August.
If September’s job gain does prove artificially low as a result of the hurricanes and October’s or November’s numbers are artificially high, economists and the Federal Reserve may find it hard to assess the state of the economy with any precision over the next couple of months. Even so, most Fed watchers expect the central bank to raise its benchmark interest rate when it meets in December.
read more: Fox Business
Amazon’s Whole Foods Lures New Shoppers From Wal-Mart, Sprouts
Amazon.com Inc.’s takeover of Whole Foods Markets has shaken the grocery business. Wal-Mart Stores Inc., Trader Joe’s and Sprouts Farmers Market Inc. may be hurting the most so far.
Whole Foods’ foot traffic from new shoppers jumped 33 percent in the first week following Amazon’s acquisition, and Wal-Mart regulars accounted for the largest percentage of first-time customers, according to research firm Thasos Group.
Amazon acquired the epicurean organic grocer in August for $13.7 billion, a move that sent shares of grocery rivals tumbling. The day Amazon completed the deal, it cut some Whole Foods prices by as much as 43 percent. In many cases, the reduced prices were still higher than similar items at Wal-Mart.
Still, that week, 24 percent of new Whole Foods shoppers were previously loyal Wal-Mart customers, Thasos reported. That same week, 16 percent of first-time visitors used to be regular shoppers at Kroger Co., while 15 percent came from Costco Wholesale Corp., according to the firm, which tracks shoppers who agree to share their location with smartphone apps.
Smaller grocers Trader Joe’s and Sprouts provided fewer new shoppers, but the losses were larger relative to the size of their customer bases. Trader Joe’s saw about 10 percent of its regular customers go to Whole Foods, while for Sprouts it was 8 percent, Thasos found. About 3 percent of Target Corp. customers defected.
read more: Bloomberg
Fallout from Equifax Breach Will Hit Banks Hardest
The ramifications of the Equifax breach are going to reverberate for some time. The full extent of the harm — while not known for several months if not longer — will definitely touch consumers, nonfinancial companies and other areas of the economy.
But make no mistake: Banks are going to pay the most of anyone.
While consumers are understandably worried about fraud and identity theft, it is financial institutions that will ultimately be on the hook for any loans they make to identity thieves.
True, fraud rates for consumer borrowing are near historic lows. However, identify thieves could use additional consumer information that they obtained from the Equifax breach (think Social Security numbers and addresses) to more accurately impersonate a consumer and, in turn, make a fake credit application look real.
As a result of that risk, banks will have to institute stricter authentication procedures.
read more: American Banker
Low Inflation Could Put Central Bankers’ Superhero Status at Risk
Sometime between fighting the global financial crisis and averting the breakup of the eurozone, central bankers began to be viewed as superheroes. They are in danger of becoming victims of their own success.
Global rate-setters’ omnipotent status has less to do with firefighting and more to do with conquering the soaring inflation of the 1970s and ’80s. Granted, luck as well as skill had something to do with annual price increases falling toward the 2 percent that most of them target.
Globalization and technological advances have been pushing down prices in the past three decades. But central banks received — and took — most of the credit for the achievement. In doing so, they also cemented their position as elite technocrats, protected from meddling politicians. But that status is increasingly in doubt. At a Bank of England conference to mark two decades of monetary policy independence last week, participants fretted over the risks posed by unrealistic expectations.
First, rate-setters may have built up too much inflation-fighting credibility for their own good, as Christina Romer, a professor of economics at the University of California, Berkeley, pointed out. Workers will be less apt to push for higher pay if they are convinced any price spikes will prove temporary. That’s a huge problem when inflation is too low, as is the case now in some countries. The European Central Bank president, Mario Draghi, or his Bank of Japan counterpart, Haruhiko Kuroda, would dearly love wage demands to start the sort of inflationary spiral that their predecessors once feared.
read more: NYT
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