Fed tapering in US will send chill across Asian property markets

[princess_morbucks]

http://www.scmp.com/property/hong-ko...asian-property

The winding down of the US Federal Reserve's quantitative easing (QE) programme is expected to result in rises in long-term interest rates around the world, and we believe this will have significant repercussions on Asia-Pacific property markets.
Indeed, initial talk of "tapering" of the programme during the first half of last year triggered a significant widening of government bond yields.
Across the Asia-Pacific region, bond yields increased by as much as 80 basis points over the year, with changes most evident in emerging markets amid concerns over capital outflows and the increased cost of funding.
Due to the increase in bond yields, the spread between prime property yields and government bond yields has narrowed in many markets, reducing the risk premium for investing in property relative to government bonds.
Conventional wisdom suggests that gradual rises in bond yields will put upward pressure on property yields in the medium term, and thereby place downward pressure on prices.
This is especially the case when growth in rents is not sufficient to outweigh the effect of yield decompression.
In some markets, such as Hong Kong, Taipei, and Singapore, property yield spreads were at or very close to five-year lows at the end of last year, indicating that pricing momentum on prime property has become more strained. Currently the spread is less than 1 per cent in Hong Kong, 1.6 per cent in Taipei, and 2.3 per cent in Singapore.
Narrowed yield spreads mean we expect yield decompression to start earlier in the region's two financial gateway cities of Singapore and Hong Kong, where property markets are sensitive to hot money flows and where historically there has been a high correlation between bond and property yields.
With its currency pegged to the greenback, Hong Kong has imported the United States' loose monetary policy, which has pushed bond and property yields down to historic lows. Rising yields triggered by interest rate hikes will likely outweigh any gain in rents, and we expect will result in a price correction of 15 to 20 per cent in Hong Kong over the next two years.
By contrast, sustained office demand in Singapore is supporting rental growth, with prime rents having risen 3 per cent in the second half of 2013. The positive outlook for rents will serve to balance the negative effect of a mild yield decompression, and lead to modest rises in capital values over the next couple of years.
We expect yields to stay low for longer in Japan and Australia, given the continuing accommodative monetary policy in these two countries and a relatively wide spread between bond yields and property yields.
The property market in Japan is benefiting from Prime Minister Shinzo Abe's reflationary policies, which are essentially a continuation of QE. Against this backdrop, we expect yields to compress slightly further in the short term, making Japan the most attractively priced market in the Asia-Pacific region.
We are cautiously optimistic on the outlook for Australia, where the commodity supercycle has run its course on the back of slowing demand from China. As a result, the office market is seeing higher vacancy and tenant incentives.
Similar to Japan and Australia, yields in China are less exposed to tapering in the US. However, five-year government bond yields surged to a 16-year high of about 4.5 per cent last month, reflecting a note of heightened caution on the strength of the financial market in China.
Rapidly rising bond yields have squeezed the income spread to less than 1.5 per cent for prime properties in tier-one cities like Beijing and Shanghai. Considering an onshore borrowing cost of seven to 8 per cent, investors actually face a negative carry for investing in prime core assets in China.
Sharp increases in bond yields, the declining income spread on property, and a weaker capital-growth outlook as a result of tighter credit have combined to make Chinese property markets less attractive to investors.
As a whole, going forward we expect the pricing of property markets in Asia-Pacific will become less attractive on a risk-adjusted basis to investors as QE in the US is unwound.
Although global interest rates are expected to stay low in the foreseeable future, investors should prepare themselves for a gradual increase in the cost of funding. This means they will need to move up the risk-curve to achieve higher returns on property as yields decompress core property markets.

[Arcachon]

When there is crisis, there are opportunity. Get ready for more Wealth transfer. Huat Ah.......

[Royston8H]

if first qe3 tapering was positive, likely more than 10% tapering next to come. Interest rate rise will be sharper. Yellen will need to show results too

http://www.scmp.com/property/hong-ko...asian-property

The winding down of the US Federal Reserve's quantitative easing (QE) programme is expected to result in rises in long-term interest rates around the world, and we believe this will have significant repercussions on Asia-Pacific property markets.
Indeed, initial talk of "tapering" of the programme during the first half of last year triggered a significant widening of government bond yields.
Across the Asia-Pacific region, bond yields increased by as much as 80 basis points over the year, with changes most evident in emerging markets amid concerns over capital outflows and the increased cost of funding.
Due to the increase in bond yields, the spread between prime property yields and government bond yields has narrowed in many markets, reducing the risk premium for investing in property relative to government bonds.
Conventional wisdom suggests that gradual rises in bond yields will put upward pressure on property yields in the medium term, and thereby place downward pressure on prices.
This is especially the case when growth in rents is not sufficient to outweigh the effect of yield decompression.
In some markets, such as Hong Kong, Taipei, and Singapore, property yield spreads were at or very close to five-year lows at the end of last year, indicating that pricing momentum on prime property has become more strained. Currently the spread is less than 1 per cent in Hong Kong, 1.6 per cent in Taipei, and 2.3 per cent in Singapore.
Narrowed yield spreads mean we expect yield decompression to start earlier in the region's two financial gateway cities of Singapore and Hong Kong, where property markets are sensitive to hot money flows and where historically there has been a high correlation between bond and property yields.
With its currency pegged to the greenback, Hong Kong has imported the United States' loose monetary policy, which has pushed bond and property yields down to historic lows. Rising yields triggered by interest rate hikes will likely outweigh any gain in rents, and we expect will result in a price correction of 15 to 20 per cent in Hong Kong over the next two years.
By contrast, sustained office demand in Singapore is supporting rental growth, with prime rents having risen 3 per cent in the second half of 2013. The positive outlook for rents will serve to balance the negative effect of a mild yield decompression, and lead to modest rises in capital values over the next couple of years.
We expect yields to stay low for longer in Japan and Australia, given the continuing accommodative monetary policy in these two countries and a relatively wide spread between bond yields and property yields.
The property market in Japan is benefiting from Prime Minister Shinzo Abe's reflationary policies, which are essentially a continuation of QE. Against this backdrop, we expect yields to compress slightly further in the short term, making Japan the most attractively priced market in the Asia-Pacific region.
We are cautiously optimistic on the outlook for Australia, where the commodity supercycle has run its course on the back of slowing demand from China. As a result, the office market is seeing higher vacancy and tenant incentives.
Similar to Japan and Australia, yields in China are less exposed to tapering in the US. However, five-year government bond yields surged to a 16-year high of about 4.5 per cent last month, reflecting a note of heightened caution on the strength of the financial market in China.
Rapidly rising bond yields have squeezed the income spread to less than 1.5 per cent for prime properties in tier-one cities like Beijing and Shanghai. Considering an onshore borrowing cost of seven to 8 per cent, investors actually face a negative carry for investing in prime core assets in China.
Sharp increases in bond yields, the declining income spread on property, and a weaker capital-growth outlook as a result of tighter credit have combined to make Chinese property markets less attractive to investors.
As a whole, going forward we expect the pricing of property markets in Asia-Pacific will become less attractive on a risk-adjusted basis to investors as QE in the US is unwound.
Although global interest rates are expected to stay low in the foreseeable future, investors should prepare themselves for a gradual increase in the cost of funding. This means they will need to move up the risk-curve to achieve higher returns on property as yields decompress core property markets.

[indomie]

if first qe3 tapering was positive, likely more than 10% tapering next to come. Interest rate rise will be sharper. Yellen will need to show results too

QE was implemented as a non traditional measure (traditional measures being interest rate and exchange rate). US economy was in such a dire straight that if traditional measure was imlemented the interest rate has to be negative. However u can't have a negative interest rate.

Winding down QE as a non traditional measure, doesn't mean the traditional measure will be wind down as well. That's why we will likely to experience low interest rate long after QE has stopped.

[Royston8H]

Hmm.. i have other thoughts. If i am not wrong, QE3 will pull out completely by dec 2014 after another 6-7 rounds of meetings.

Interest rate cannot be suppressed that low for a long time. Jus kana another letter from one of my banks that they are rising the interest again.

QE was implemented as a non traditional measure (traditional measures being interest rate and exchange rate). US economy was in such a dire straight that if traditional measure was imlemented the interest rate has to be negative. However u can't have a negative interest rate.

Winding down QE as a non traditional measure, doesn't mean the traditional measure will be wind down as well. That's why we will likely to experience low interest rate long after QE has stopped.

[mummy]

Hmm.. i have other thoughts. If i am not wrong, QE3 will pull out completely by dec 2014 after another 6-7 rounds of meetings.

Interest rate cannot be suppressed that low for a long time. Jus kana another letter from one of my banks that they are rising the interest again.

My bank actually sent me a letter that said they are lowering my interest rate. Mine was a SOR package...was quite surprised....

[Royston8H]

yup, i am surprised to Mummy's comments too.

[indomie]

Hmm.. i have other thoughts. If i am not wrong, QE3 will pull out completely by dec 2014 after another 6-7 rounds of meetings.

Interest rate cannot be suppressed that low for a long time. Jus kana another letter from one of my banks that they are rising the interest again.

What would the fed will do with the huge amount of long dated treasuries they amassed during the QE? They have to sell it to somebody which in turn need to pay the interest to. Rising the interest rate will create a huge burden to themselves.

[princess_morbucks]

What would the fed will do with the huge amount of long dated treasuries they amassed during the QE? They have to sell it to somebody which in turn need to pay the interest to. Rising the interest rate will create a huge burden to themselves.

Lol...so it is a vicious cycle.
As long as they buy bonds, they have to keep interest rates low.

[Royston8H]

See the first para from the initial link pointed out by Princess M -> http://www.scmp.com/property/hong-ko...asian-property

Why QE3 tapering will cause market jitter? Interest rate will only have one direction, i.e. uptrend when "fake" or so called "printed" money will be used lesser and lesser.

Since problematic assets are acquired by printing money, they can be subsequently waited for their turn to be appreciated. If you already know, foreclosures homes in USA are already risen in price when economy turns good. As long as US economy is improving with reducing unemployment rate, QE tapering can be sustainable. I bought a few distressed properties there. Prices are going up.

What would the fed will do with the huge amount of long dated treasuries they amassed during the QE? They have to sell it to somebody which in turn need to pay the interest to. Rising the interest rate will create a huge burden to themselves.

[indomie]

Lol...so it is a vicious cycle.
As long as they buy bonds, they have to keep interest rates low.

As long the fed is still buying the bond, they are not paying the interest. However when the buying stop and they sell it back to the open market, they have to service the interest. They can't sell it to the open market if the interest is too high.

[indomie]

See the first para from the initial link pointed out by Princess M -> http://www.scmp.com/property/hong-ko...asian-property

Why QE3 tapering will cause market jitter? Interest rate will only have one direction, i.e. uptrend when "fake" or so called "printed" money will be used lesser and lesser.

Since problematic assets are acquired by printing money, they can be subsequently waited for their turn to be appreciated. If you already know, foreclosures homes in USA are already risen in price when economy turns good. As long as US economy is improving with reducing unemployment rate, QE tapering can be sustainable. I bought a few distressed properties there. Prices are going up.

On the micro level things are improving. But the fundamental weaknesses are still there. US is not only new york and los angeles. US need to carry many other states. If credit tightening is implemented too soon, some weak states will collapse.

[indomie]

People don't realised that fixing US economy is like finding a cure for cancer. Once in a while alternative medicine comes along with the promise of a cure. Then they start to get excited when they see a slight improvement, only to be dissapointed again when they find out that it was only a placebo effect.

If the solution to indebtedness is to spend some more, then we have discover a holy grail of secret to prosperity. This voodoo economic doesn't work.

[DC33_2008]

Well DJI went up 128pts this morning.

People don't realised that fixing US economy is like finding a cure for cancer. Once in a while alternative medicine comes along with the promise of a cure. Then they start to get excited when they see a slight improvement, only to be dissapointed again when they find out that it was only a placebo effect.

If the solution to indebtedness is to spend some more, then we have discover a holy grail of secret to prosperity. This voodoo economic doesn't work.

[Royston8H]

Agree. Us officials n the whole world knows that qe3 is all about printing more money to solve what debt was being ballooned up in the past n subprime sega. Printing money is just like taking opium. The more u take the more harm to the economy. Look at the weaker usd currency then u will understd y.

they can continue qe3 but why they r tapering more intensively? I.e by end dec2014? Either way of doing it or not will cause adverse impact if not handled properly. It will take a long time for us to recover for sure.

As long as us economy is getting better, unemployment rate is better, more people will spend to boost the economy. Business will want to expand n borrow money. Bank can then gradually increase the interest rate. How long can they take opium? They know they must cut it one day before qe3 gets uncontrollable, usd currency loses its dominance.

Bonds issurance will never stop just like before subprime.

People don't realised that fixing US economy is like finding a cure for cancer. Once in a while alternative medicine comes along with the promise of a cure. Then they start to get excited when they see a slight improvement, only to be dissapointed again when they find out that it was only a placebo effect.

If the solution to indebtedness is to spend some more, then we have discover a holy grail of secret to prosperity. This voodoo economic doesn't work.

[indomie]

We all have a limited financial resources. Even if we know the direction of the economy in the long run, this limited financial resources will limit our response. We cannot bet all out for the long run, while staving in the short run. Neither we bet all in the short run, while suffer loses at the end.

So I think EM market and property is a long run strategy. However in the short run US equity has a lot of tail wind.

[princess_morbucks]

As long the fed is still buying the bond, they are not paying the interest. However when the buying stop and they sell it back to the open market, they have to service the interest. They can't sell it to the open market if the interest is too high.

Thanks for the clear explanation!
Another question: what will force them to sell the bond?

[indomie]

Thanks for the clear explanation!
Another question: what will force them to sell the bond?

Under the current economy model, US has reached "the limit of growth". The more they invest, the lesser the return. The law of disminishing return.

That's why their interest rate will remain low. They simply can't afford to pay high interest.

US is in technically bankrupt situation. Selling their bond to other is not viable because nobody will buy it. So if u have a bad credit, but one of your rich uncle is willing to guarantee your loan. Probably you are safe for a while. Hoping that your rich uncle will stay rich. However if both you and your rich uncle fell into trouble, who can safe you this time?

Some states in the US are still rich. These rich states holding the whole country together. They act as a guarantor. As long as the country still holding together there is no need to force selling the bond. Should the rich states breaking away from the poor states, then they probably will.