The impact on Asia Pacific real estate from the end of US QENovember 11, 2014 / By
With the impact of the end of QE programme in the US, we have been discussing the range of likely effects on the commercial real estate markets in Asia Pacific. During QE the IMF issued spill-over reports looking at the global effects of QE via the transmission mechanisms of capital flows, interest rates and foreign exchange. The implementation of QE programmes in advanced economies produced significant spill-over effects, with strong capital flows from advanced economies into developing markets. Global interest rates have been driven lower and investors have been deploying additional capital into real estate in the search for yield.
In Asia Pacific these two factors, foreign capital flows to developing markets plus additional capital deployed to real estate in search of yield, created a wave of investment in real estate that led some governments in Asia to implement regulations to cool real estate markets, primarily aimed at residential property. The effect of additional capital was also visible in commercial markets. In 2011 and 2012 total Asia Pacific commercial transaction volumes were just under USD 100b a year; in 2013 the volumes jumped 30 percent to USD 126b.
In 2014, the global and inter regional capital flows of investment in Asia Pacific commercial real estate from global, US and Europe investors in the first nine months have already exceeded last year’s total by 35 percent. Continuing economic recovery in the US appears to be providing funds for US and global investors to deploy in Asia Pacific for diversification and we expect that picture to continue in the medium term.
Within countries the government cooling effects have been successful so the picture is mixed on transaction volumes. So far this year transaction volumes in Asia Pacific as a whole have been stable, off five percent. In the large markets, Australia is up over 20 percent and continues to see strong cross border interest. Japan is stable with cross border investors meeting local investor pricing; whereas China is down around 20 percent, where the government’s cooling measures aimed at the residential market and developers have had a knock on effect to the commercial real estate markets.
The ending of US QE should see the start of the normalisation of interest rates. The impact of potential interest rate rises and their effects on real estate yields should be off-set by the expectation of rising rents in most major office markets in the AP region. Our JLL Cap Markets research shows a strong correlation between rising short-term interest rates and rising rents; interest rates rise where economic activity is rising, which induces higher rents. Or interest rates rise as there is inflation in the system, again inducing rising rents.
Overall, our view is that the weight of capital aimed at real estate will continue as the global economy and in particular the US recovers. Investors will continue to see core real estate as a highly attractive asset class in any portfolio, for its ability to deliver yield, stability of returns as well to act as an interest rate hedge. Asia Pacific will remain attractive as a key engine of global growth and as a diversification play for international investors.