|Situs RERC Insights into Real Estate Sectors
Industrial – Still Some Room for Growth
The industrial market hit a new height in 2016 with strong performance all around, and the positive trajectory is expected to remain in the near future. More people ordering online might mean fewer people shopping in physical stores, but it also means that more space is needed for storage and distribution centers, and there’s no reason to believe this will change any time soon. With decreasing vacancy and solid rent growth, the industrial market is stronger than ever. Supply lags in most of the regions, particularly in urban infill locations.
Among the regions, the West is expected to see an overall increase in manufacturing and distribution workers, which will lead to greater demand for space. The trend is declining in the Midwest, increasing in the South, and somewhat mixed in the East.
The main driver behind the strong returns is the healthy mix of appreciation and income return. The West region in particular has seen appreciation return outperforming income return, which is a rare sight given the recent weak appreciation performance in other sectors.
Retail – Decline Continues
The continuing rise in e-commerce is placing a great deal of pressure on the traditional retail market. Many major stores are continuing to close across the country and demand for brick-and-mortar space is decreasing. In some sense, this may signal both the winding down of retail and the ascendancy of e-commerce as the new retail market leader.
The two important drivers for the retail industry are personal income and employment, which have been inching up in recent years and making the retail market a bit less prone to a large downward spiral. With strong fundamentals, the income returns are expected to remain solid in the foreseeable future. Given the expected strong rent and employent growth, the appreciation returns will be somewhat steady, albeit downward trending, in the near future and reverting to long-term averages in a few years.
If retailers want to survive in this brutal environment, they have to offer their customers something more than a run-of-the-mill shopping experience. Consumers want to be entertained, because if they’re just looking for a pair of socks they can order them online. But while retailers and brands may come and go, the buildings still remain. If a retail space is located in an easily accessible location, with top-rate amenities, new tenants will move in.
Click here to read Situs RERC’s views on the Office and Apartments sectors.
Fed keeps U.S. rates steady, to start portfolio drawdown in October
The U.S. Federal Reserve left interest rates unchanged on Wednesday but signalled it still expects one more increase by the end of the year despite a recent bout of low inflation.
The Fed, as expected, also said it would begin in October to reduce its approximately $4.2 trillion in holdings of U.S. Treasury bonds and mortgage-backed securities acquired in the years after the 2008 financial crisis.
New economic projections released after the Fed’s two-day policy meeting showed 11 of 16 officials see the “appropriate” level for the federal funds rate, the central bank’s benchmark interest rate, to be in a range between 1.25 percent and 1.50 percent by the end of 2017, or 0.25 percentage points above the current level.
U.S. bond yields rose, pushing up the U.S. dollar after the Fed’s decision, but U.S. benchmark stock indexes were little changed.
U.S. benchmark 10-year Treasury note yields rose as far as 2.29 percent, the highest since Aug. 8., a move which helped push bank stock prices higher also.
read more: Reuters
As the Fed Steps Back From Mortgage Market, REITs Gear Up to Buy
Many fund managers are fearful about the Federal Reserve shedding its massive $1.78 trillion mortgage bond portfolio, a step it plans to start next month. Some investors say it’s time to get greedy.
Some mortgage bond fund managers known as real estate investment trusts have been raising cash at their fastest pace since 2013, giving them enough new capacity to buy more than $30 billion of the securities, according to data compiled by Bloomberg. And banks have added almost $100 billion of mortgage bonds to their books this year, Fed data show, and their demand doesn’t seem to be waning.
Buying from these kinds of investors underscores how even as the Fed scales back from the market, others will fill the void, and in the near term at least there may be less disruption than many money managers had feared, said Jason Marshall, chief investment officer at Invesco Mortgage Capital, a REIT. For mortgage REITs and other investors that can borrow against their holdings, the potential returns are an eye-popping 12 to 13 percent after hedging, making these securities a no-brainer, Marshall said.
“There’s a decent amount of demand for mortgage bonds that I think a lot of people weren’t necessarily expecting this year,” Marshall said. A senior executive at Annaly Capital Management Inc. said last month that this may be the best opportunity in decades for mortgage REITs to expand. Investors that had shied away from agency mortgage bonds in favor of corporate securities may come back.
read more: Bloomberg
Europe’s Foreign Debt Binge Could Push U.S Rates Lower
European investors are buying more foreign bonds than ever before, another sign that many fund managers aren’t expecting tapering from the European Central Bank to boost local yields anytime soon.
The trend has global implications. Heavy demand from the eurozone puts pressure on yields elsewhere in the world, including the U.S., and lowers borrowing costs there. The eurozone’s investors are big spenders: In 2016, local investors bought around $500 billion in foreign, mainly government, bonds, almost enough to cover the entire $584.7 billion U.S. budget deficit.
The most recent numbers, between May and July, show that the eurozone’s investors bought €160.8 billion ($191.7 billion) in international bonds, the largest sum in any three-month period on record, according to data from the ECB.
ECB stimulus, including negative interest rates and a massive bond-buying program, have pushed down the yields on local government debt to record lows. That has made investors look elsewhere for returns.
read more: Wall Street Journal
BlackRock Sells Singapore Office Tower for $1.5 Billion
CapitaLand Commercial Trust, Singapore’s biggest office landlord, agreed to buy BlackRock Inc.’s Asia Square Tower 2 for S$2.1 billion ($1.5 billion) in the city’s second-largest ever sale of an office building.
The transaction will be partially funded by a rights issue of about S$700 million and bank borrowings of about S$1.12 billion, CapitaLand Commercial Trust said in a statement. The company said divestment proceeds of about S$340.1 million from previous property deals will also help fund the purchase.
The sale is the latest in a series of blockbuster commercial property deals in Singapore. Qatar Investment Authority, the gulf state’s wealth fund, last year bought the adjacent Tower 1 from BlackRock for S$3.4 billion in what was Singapore’s biggest office transaction.
“The deal provides another pricing benchmark which reconfirms that the recovery in office rents and prices is well underway in Singapore,” said Jeremy Lake, executive director of capital markets at CBRE Inc. in Singapore. CBRE was one of the advisers to BlackRock.
read more: Bloomberg
China’s Small Banks Face Funding Crunch as Regulations, Liquidity Tighten
China’s small banks are struggling to raise funds through short-term instruments as a regulatory squeeze combines with tight liquidity ahead of the quarter-end and Golden Week holiday.
With few options for funding, some banks have returned to issuing negotiable certificates of deposit (NCDs), a form of non-collateralised short-term funding that regulators have tried to discourage in their battle against speculative financing.
The premium paid by lower-rated Chinese banks over higher-rated ones for NCDs spiked last week, highlighting risks to the country’s smaller lenders. The spread between three-month AAA- and AA-rated NCDs hit 51 basis points, the highest on record.
While the spread has narrowed, analysts say it points to a trend of higher financing costs for weaker lenders.
“What you see there is a reflection of the fact that (small banks) are forced to seek more expensive liquidity,” said Alicia Garcia-Herrero, Asia Pacific chief economist at Natixis. “No matter how much they chase for new markets, they will always be penalized.”
read more: New York Times
JPMorgan retains supremacy as the king of Wall Street
The latest ranking of Wall Street supremacy is out, and there’s a notable shift at the top of the league tables.
JPMorgan once again dominated the competition in the first half of the year for revenue across fixed income, equities, and banking, according to the data-analytics company Coalition.
The largest bank by assets in the US hauled in $13.2 billion in revenue through half of 2017 — up from $12.5 billion at last year’s midpoint — ranking No. 1 in investment banking and FICC (fixed income, currencies, and commodities) and tying for first in equities with Morgan Stanley.
read more: Business Insider
Have a prosperous week ahead.
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