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January 11, 2016

Late last year, the U.S. Federal Reserve raised interest rates for the first time since 2006 after holding them near zero for seven years. In making the move, central bankers cited an improved labour market and expectations that inflation will eventually return to their 2 percent goal. While the decision has caused concerns about further capital outflows from emerging markets, its impact on the key real estate markets in Asia Pacific is wide ranging.

Speaking on December’s rise, a panel of JLL researchers gave their insights on the impact of potentially higher borrowing costs for individual markets in the region.

Japan
“The interest rate hike in the U.S. is an indication that the U.S. economy is gaining strength. This will translate to a healthier Japanese economy, driven by exports to the U.S. Meanwhile, a recovering U.S. economy combined with continuous monetary easing policies in Japan will likely put pressure on the yen. A depreciating yen would also be supportive for Japan’s economy. On the flip side, a possible slowdown in Southeast Asia due to likely U.S. driven capital outflows may have a slightly negative bearing on Japan, but all in all, the U.S. rate hike should be rather positive for Japan.” Takeshi Akagi, Head of Research

Hong Kong
“The decision by the city’s commercial banks not to raise rates in tandem with the U.S. Federal Reserve and the Hong Kong Monetary Authority effectively keeps deposit and borrowing rates in the city unchanged. Nevertheless, the 25 basis points hike has already started to dampen market sentiment and the impact on the city’s commercial property market is likely to be uneven. With the vacancy rate at a 10-year low and the rental market showing signs of a recovery, capital values in the city’s Grade A office market are likely to continue to hold firm, if not rise further. Adding further support to the office sector is the large amount of capital from mainland China and insurance companies waiting to be deployed, which may actually see market yields further tighten, as evidenced by two very substantial transactions completed by mainland Chinese buyers in the fourth quarter of 2015.” Denis Ma, Head of Research, and Research Analyst Ryan Ip

Singapore
“The Singapore property market, especially the residential sector, has already made provisions for this rise in U.S. rates. For example, in the calculation of the TDSR (Total Debt Servicing Ratio), Monetary Authority of Singapore policy requires banks to use an interest rate of 3.5 percent for residential loans and 4.5 percent for non-residential property loans. Some asset yields should ease marginally to accommodate the gradual rise in lending rates but otherwise, we do not foresee a drastic downshift in the property market here as a result of this recent hike.”

“However, if domestic rates were to climb too drastically and the local and regional economies weaken further, this will have an adverse impact on the property market as households struggle to meet higher loan repayments amid a weak leasing market.” Dr Chua Yang Liang, Head of Research Southeast Asia and Singapore

China
“The developers who borrowed debt overseas are likely to have expected December’s rate hike and should have set up some hedges in advance to deal with this issue. Probably, more importantly, onshore financing costs are on the decline and have room for further reduction. In this regard, China is in a better position than other countries.”

“That said, there will be some pressure on overleveraged real estate developers or developers with non-performing projects in lower tier cities. There will be repayment risk and debt covenants may be breached, especially for developers with non-performing projects, particularly in the residential sector, which might have failed to pre-sell on schedule.”

“Developers who borrowed in USD or Euros may feel the pressure if the RMB is further devalued as a U.S. rate increase generally places downward pressure on emerging market currencies such as the Yuan.”

“Healthy assets that are located in prime or first tier cities should face less impact than those assets that are located in more challenging markets with less than optimal performance. If rates grow further, there will be a polarization of asset performance as well as city performance.” Joe Zhou, Head of China Research and Joseph Kim from Capital Market Research Shanghai

India
“Given that India’s government has virtually opened up its real estate for foreign direct investment, the recent U.S. rate rise is unlikely to impact the country’s real estate market. Over the past few years, Modi’s government has removed investment barriers including changing the investment size and nature of asset classes that foreign investors are permitted to buy. Repatriation conditions of foreign investment have also been eased.”

“The changes make India’s real estate sector a much bigger and attractive market for foreign investment and foreign funds will likely be keen to remain active in India on account of competitive valuations of assets and rental growth forecasts. Some money may travel back to the U.S., but there will likely be more capital that will flow into India with the opening up of the domestic real estate market for foreign direct investment.” Limaye Ashutosh, Head of Research

Australia
“The Fed rate hike in late 2015 was well telegraphed in advance, so was largely priced in to market expectations. Of greater significance is the timing and extent of future moves. The Fed has said these will be slow and gradual. Nevertheless futures markets are currently pricing in U.S. rate increases while, in Australia, the futures market is pricing in at least one more reduction in the official cash rate.”

“Under these circumstances is seems likely that the AUD will weaken against the USD over the course of 2016. Through 2015 the AUD weakened against most Asia Pacific currencies as well as the USD and Sterling and a weaker AUD makes Australian property markets more attractive to offshore investors. 2015 saw record levels of investment in the Australian real estate sector by foreign buyers, particularly from Asia, and this trend seems likely to continue into 2016.” David Rees, Head of Research, Australasia

For more information:

the JLL research team

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