Shaowei told the South China Morning Post that the rate hike pause will not manifest directly into higher commercial property prices in APAC.
He explained that property income yields have been low for some time and even as interest rates remain low, the marginal benefit to the sector “is very limited”.
The common view has always been that long term interest rates are generally positively correlated with property yields. This explains the dread in most commercial real estate investors when the US Fed started raising interest rates two years back, as that also alluded to a possible reversal of yield compression (i.e. property income yields decrease and property prices increase). For sure, yield compression across some markets has slowed, but the turning point has certainly not arrived.
To that end, as APAC reverts to an accommodative monetary stance now, the same investors are probably hopeful that capital values continue to be protected or even boosted.
Shaowei does not see that happening in most cases.
Property income yields across most APAC markets are already at their lowest in the last 10 years, driven by the weight of capital jostling for limited stock in the region. He elaborates that global private capital dry powder surpassed USD 2tn as at June 2018, of which close to 20% is focused on Asia Pacific, according to Preqin.
However, he remains skeptical as to how much further the lower boundaries of prime yields can be breached even if monetary conditions stay looser for longer.
What should investors do?
“Curb your enthusiasm” says Shaowei. He advises investors to focus on enhancing rental income and not presume the certainty of capital gains on their purchases.
While lower interest rates are positive news for real estate investors, there are a few points to note:
- Interest rates may still normalise in the longer term, especially if the US re-ignites its hawkish rhetoric.
- Property yields in most of APAC are already at historical lows, there could be limited room to tighten further in absolute terms.
- Thirdly, pricing risk is much higher in some markets than others. In markets where yield spreads are already treading dangerous grounds, the marginal benefit from an extended period of low interest rates is very limited. In these markets, investors should take this intermission and start to prepare for the eventual reversal of capital value appreciation, looking towards income growth to cushion against any possible hard landing.
Read his full report and conversation with South China Morning Post (SCMP).
Head of research and strategy APAC
Shaowei joined UBS Asset Management’s Real Estate business – a business which forms part of Real Estate & Private Markets (REPM) – in 2015. He is directly responsible for real estate research and strategic initiatives within Asia Pacific, and formulates market views for use within the direct Real Estate and Multi Managers Real Estate (MM-RE) businesses. He also facilitates capital raising and investment underwriting efforts.
Toh Shaowei is a member of the Real Estate Asia Pacific (RE-APAC) Investment and Management Committees.
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