how important are bond markets for commercial real estate?
TRANSCRIPT
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CRE Capital Markets Review:
How Important Are Bond Markets For Commercial Real Estate?
Heidi Learner
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Presentation Overview
QE and Bond Market Overview Interest Rates and the Linkage to Commercial Real Estate
The Range of Outcomes
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Anatomy of a Crisis: Part I Prices rarely move in one direction
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Anatomy of a Crisis: Part II The great reflation: coming to an end?
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QE RecapWhat is quantitative easing?
Quantitative Easing:“A nonconventional policy… in which the central bank provides additional support for the economy and the financial system by expanding the monetary base, for example, through the purchase of long-term securities.” -Chairman Bernanke, 5/25/2010
The Fed’s Balance Sheet Over Time
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Timeline of QE in the U.S. “Once is never enough”
QE I: December 2008 to March 2010• $600B in agency mortgage-backed securities (MBS) and agency debt. • Expansion March 2009: addl $750B in MBS and agency debt; $300B in USTs.
QE II: November 2010 to June 2011 • $600B of longer-dated treasuries ($75B per month).
Operation Twist: September 2011• Purchase $400B of bonds with maturities > 6 years; sale of bonds with
maturities < 3 years.• Extension with additional $267B in purchases through 2012.
QE III: September 2012• Open-ended purchase commitment for $40B in agency MBS until the labor
market improves "substantially." • Expansion December 2012; up to $40B in agency MBS per month and $45B of
longer-term USTs.
Taper: December 2013 • Purchases scaled back to $10B at each meeting; program ends October 2014.
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Significant Rate Volatility Despite Stable Short Rates
Fed Funds target in August 2007 = 5.25%Fed Funds target in December 2008 = 0 – 25 bps
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The Bond Market By Country of IssuerThe U.S. vastly dominates the debt market
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The US: Very Much A Culture of DebtSeptember YTD 2015 total issuance is up 10.2% vs. September YTD 2014
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Interest Rates and the Linkage on Commercial Real Estate
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Why Do Bond Markets Matter to Real Estate? Impact is not limited to domestic purchasers
Benchmark• Government yields set a risk-free benchmark for returns
Financing • CMBS and bank loan spreads are often a function of government
yields/ swap spreads
Currency Impact• Relative bond yields between countries may influence currency
appreciation
Liquidity• Shifts in the liquidity of government debt (and corporate debt)
may influence the attractiveness of other long-term assets
Monetary policy Fiscal policy to the rescue?
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CRE Volume in the Americas: Half of All Activity
Global Volume by Region (office, industrial, retail, apartments and hotels)
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One Reason U.S. Debt Remains Attractive The global search for yield is still on
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Cap Rates: Tumbling With Treasury Yields
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The Fed: The Only Rate Hike In Sight?
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The Strong Dollar Has Not Hampered Global Inflows
Cross-Border Investment in U.S. Office, Industrial and Retail Properties
U.S. Investment ActivityBy Buyer Type
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What (and Where) Are the Potential Hazards?
CHINA
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A China Phenomenon?Direction Acquisitions by Cross-Border Investors in the U.S.
Rolling Four Quarters
Source: Real Capital Analytics
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Cross-Border Activity (office, industrial and retail) No, It’s Not All About China
Source: Real Capital Analytics
Source 2012 Volume ($M)
2013 Volume ($M)
2014 Volume ($M)
2015 YTD Volume ($M)
Canada 7,424.5 7,491.0 6,047.0 8,717.5
Norway n/a 1,982.8 4,356.9 9,168.4
Singapore 847.3 417.8 1,303.3 8,614.7
Germany 1,805.6 2,250.7 2,246.1 2,926.7
Australia 1,137.6 1,027.3 880.6 2,736.1
Hong Kong 916.8 512.7 1,885.5 1,491.2
China 84.4 2,274.6 1,521.5 747.4
Switzerland 561.3 1,546.9 824.5 1,572.9
South Korea 1,059.7 1,568.2 541.0 903.2
Israel 910.8 1,485.7 1,057.6 534.6
All Others 5,559.2 5,239.8 5,541.5 5,659.1
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Who Owns U.S. Debt? Japan is no longer in top place…
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China Estimated Capital Flow Inflows = FX purchases by banks + change in FX depositsOutflows = Monthly trade balance + direct investment balances
Example capital outflowAn exporter who chooses to keep FX earnings offshore
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What Could Stop the Flow? Capital Controls
BEIJING—29 September China has capped the amount of money Chinese holders of bank and credit cards can withdraw outside the country, in its latest effort to discourage people from moving badly needed capital offshore.
China’s foreign-exchange regulator put a new annual cap on overseas cash withdrawals using China UnionPay Co. bank cards, a UnionPay official said on Tuesday. Under the new rules, UnionPay cardholders can withdraw up to 50,000 yuan ($7,854) overseas during the last three months of this year, and the amount will be capped at 100,000 yuan for all of next year, the official said.
The new cap is in addition to an existing 10,000 yuan daily withdrawal limit, part of China’s curbs on how much money can flow across its borders.
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Will Chinese Sell Its U.S. Treasuries for Dollars?
China Monthly Foreign Exchange Reserves
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U.S. and Global RisksA range of outcomes
Low interest rates
“Reach for yield”encourages
purchases of riskier assets
“Too much money chasing too few
goods”
Fundamentals are unchanged
Aggregate demand is still weak
Inflation
Deflation
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Further USD AppreciationOn the one hand…
USD Strength: Hurting U.S. Earnings S&P 500: % of sales to foreign countries: 47.8% in 2014 Scarce capital investment despite “cash-rich” corporate balance sheets
USD Strength: Helping U.S. Hard Assets Fear of another devaluation: may prompt more capital flight out of
China Will US owners be net sellers? US CBD office prices up 40% since pre-recession peak Q2 2011 - Q2 2015, San Francisco office rents up 87%; prices up 121%
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Eventual Rate Hikes by the FedOn the one hand…
Time for a Recession? The U.S. economy is entering its 7th year of recovery. Employment gains and housing price gains: beginning to slow.
Rate Hikes Widely Telegraphed An eventual rate hike by the Fed: should be no surprise Prior periods where rates have risen have been accompanied by
positive returns in many cases (REITS) Could further strengthen bank profitability