China: What Impact If Any On The 2016 U.S. CRE Market?

By | January 9, 2016

The chart below should tell you much of what you need to know about the likely condition of the ‘wealth effect’ in China!China,commercial real estate

 

Will any potential change in this so-called wealth effect cause investors in China (or anywhere else around the world) to pullback on commercial real estate investment in the United States?

Wealth EffectThe premise that when the value of stock portfolios rises due to escalating stock prices, investors feel more comfortable and secure about their wealth, causing them to spend more. (Source)

Of course, by extension, the opposite would theoretically hold true as well…As the value of stock portfolios decline consumers become more insecure about their wealth, causing them to spend and invest less.

2016 Investment In U.S. Real Estate

While 2015 was a banner year for commercial real estate sales in the U.S. (+16% YOY) and the best since the financial crisis, what might 2016 results look like given the global volatility that has defined the first week of the new year?

real estate,2015 CRE market

U.S. commercial real estate investment by China in 2015  totaled $8.6 billion (ex-real estate development projects) with headline deals including the insurerAnbang’s purchase of the Waldorf Astoria Hotel for $2.0 billion.

So what does 2016 hold in store particularly if volatility in China continues, stocks there continue to slide and that countries government potentially takes punitive steps to stem capital flight?

An excellent question with, unfortunately, no definitive answer possible! And, at the same time, in addition to economic conditions in China we cannot forget that the global slump in crude oil prices may curb the appetite for global investment out of the Middle East.

No Shortage Of Opinions However!

From Principal Real Estate Investors, a commercial real estate outlook for 2016 (Caveat: ‘Following The Herd Or Worse, The ‘Experts’, In Politics And Investing!‘)…

SummaryWe expect the U.S. economy to move along at a pace that is by historic standards disappointing, but relative to other developed nations, quite attractive and still beneficial to commercial real estate as whole.

Overview:

• ECONOMIC GROWTH STUCK IN NEUTRAL – The U.S. economy seems
unable to break out of its disappointing pace of growth that has kept real
GDP growth range bound between 2.0% and 2.5%, below the historical pace
achieved during previous recoveries. Although the labor and housing markets
are performing well, muted corporate and consumer spending along with an
array of global concerns – from China to sharply lower commodity prices – are
acting as governors on economic growth.
• FED SIGNALS CAUTIOUS WAY FORWARD – For investors, the pace of
tightening when the Federal Reserve (Fed) does begin the long awaited reversal
of its historic zero interest rate policy (ZIRP) will be of extreme interest. In other
words, they will want to know “how fast and how high.” It seems very probable,
given the continued uncertainty around the economic outlook, that the Fed is
likely to keep a gently upward cycle of monetary tightening.
• MORE MIXED CAPITAL MARKETS – For risk assets including commercial
real estate, a change in monetary policy may be a double-edged sword. On one
hand, tightening will mark the ending of an historic period of monetary policy
that has provided powerful capital market tailwinds for risk assets. On the other
hand, it will signal the Fed’s increased confidence in the underlying economic
environment and intensify the focus on earnings growth as the key driver
of valuation.
• RISKS AND OPPORTUNITIES LIE IN BALANCE – Our forecast calls
for continuing strength in real estate fundamentals within an uncertain
macroeconomic and capital markets environment. Real estate should benefit
from excellent demand fundamentals and very strong investor appetite for the
asset class. However, declining capital market tailwinds and full valuations in
some markets will mean that same store net operating income (NOI) growth will
be a large determinant of value creation going forward.
• UNCERTAIN ECONOMIC OUTLOOK/CAPITAL MARKETS FAVOR
SELECTIVITY – Investors are recommended to display greater selectivity be
it by market, property type or strategy. The broad “beta” play on commercial
real estate may not be as productive as selecting targeted strategies. As such,
we recommend a neutral weight to debt and the equity quadrants. However,
within each, we tilt towards modestly higher risk strategies – preferring high yield debt in non-gateway markets, value-added/opportunistic private equity
and selective new issue CMBS.

Read the full report here.

Michael Haltman is President of Hallmark Abstract Service in New York. He can be reached at mhaltman@hallmarkabstractllc.com.

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