January 17, 2019

Real estate investors have been bracing for interest rates to rise steadily throughout 2019. All of a sudden, that’s changed.

Over the past week there has been a pullback in U.S. interest rate expectations. Following comments from Federal Reserve Chair Jerome Powell, the market is considering whether the Fed rate hike in December was the last of a mini-cycle, with no more hikes priced in for 2019.

“It’s a big change that is now on everyone’s mind,” says Nicolas Wilson, head of Asia Pacific Capital Markets Research at JLL. “No rate hikes this year would be quite supportive for the real estate sector.”

The U.S. Federal Reserve raised interest rates four times in 2018, and nine since it started raising rates three years ago.

The Fed was expected to maintain this upward track through 2019. But this last week has turned that belief on its head.

“If the market becomes more convinced we’re at the end of the U.S. rate cycle, investors may start to look to increase allocations to non-fixed income asset classes,” Wilson says. “It will also support Asian markets given there are a number of U.S. pegged/soft pegged currencies that were starting to feel the impact of higher rates, like China and Hong Kong.”

For a glimpse into how the market has changed its view, look at the yield curve of U.S. Treasuries. It has flattened significantly from where it was six months ago, and is now downward sloping between the 1-year and 3-year marks.

In fact, the next move by the Fed may actually be downwards, Wilson says.

“The futures market is currently pricing in a higher probability of a rate cut relative to a rate hike between now and January 2020 with an 19.2 percent chance of a cut, 62 percent chance of no change and an 18.3 percent chance of a hike,” Wilson says.

“Interestingly, the probability of more than one rate hike between January 2019 and January 2020 is just 1.5 percent so the market is fairly convinced that we’re nearing or at the end of the upward cycle,” he says.

The shift in expectations will give other major central banks some time to catch up in the rate cycle, “as it doesn’t look like we’re in for any rate hikes in Europe, the U.K. or Japan anytime soon,” Wilson says.

Most other major markets’ benchmark curves have also fallen over the past few months, he says. The flatter curve will also improve the financing environment due to lower interest rate fixing along the curve. It will improve the hedging position for offshore investors into the U.S. (due to a lower relative spread) so it may stimulate more cross border investment as well.

An absence of further U.S. rates hikes will also help emerging markets in 2019, which experienced capital outflows last year. This led to downward pressure on their currencies and upward pressure on inflation – leading policy makers to hike rates in many of these countries.

There has been a similar shift in interest rate expectations in Australia. The consensus had been the next move by the Reserve Bank of Australia (RBA) would be upwards, however that sentiment has now reversed and the market is pricing in the likelihood of a rate cut. This may be partly due to the weaker performance in the housing market and it’s unlikely the RBA would want to exacerbate the downward trend in dwelling prices.

“If what we saw over the last couple of years in the U.S. was indeed a mini-cycle, and it’s ending, that’s going to open up a whole set of opportunities for real estate investors,” Wilson says.

Click to read why real estate allocations are concentrating on mega funds.


Nicholas Wilson

Head of Capital Markets Research, Asia Pacific JLL

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