Americas Watch - July 2017
The economic outlook for the U.S. economy remains generally favorable. While we will have to wait until late July for the first read of Q2 2017 GDP, many economists are expecting GDP growth to accelerate from a sluggish Q1, which showed expansion of 1.4%. Equity markets rest near record highs and the ISM Manufacturing and Non-Manufacturing indices have been particularly strong in recent months. Although retail sales showed the largest decline in 16 months in June, retail sales year to date compared to a year ago demonstrate sufficient forward momentum. That being said, while there are no panic alarms brazenly flashing regarding commercial real estate, developments in 2017 have resulted in some caution. The availability of commercial real estate loans have tightened on net during the last nine months, particularly for multi-family and development financing. While treasury yields have come down from recent peaks, they are still notably above pre-election rates and the Fed has also raised base interest rates for the second time this year. These two developments could eventually lead to moderate upward pressure on cap rates, which are largely near cyclical lows for most property types and/or markets.
Europe Watch - July 2017
So much for predictable politics. In recent years the UK electorate sure has had a tendency of delivering surprises at the ballot box. In 2010 the first coalition government since the 1970s was unexpectedly chosen, in 2015 the pollsters and betting markets didn’t anticipate an outright Conservative win and we all know what happened last year. So it shouldn’t be terribly surprising that in the recent snap general election the Prime Minister’s Conservative Party lost its Parliamentary majority, giving way to a Hung Parliament and subsequently a confidence-and-supply agreement with the Democratic Unionist Party (DUP) of Northern Ireland. While this outcome complicates the outlook, we feel that the impact on the real economy is unlikely to have a pronounced negative effect. After all, we are at full employment, corporate profits are healthy and global growth is picking up. Furthermore, we take some comfort in the fact that historically elections in the UK have tended not to significantly impact economic performance in the year of a vote. While uncertainly remains elevated for the broader market, it has arguably decreased in Scotland. The loss of seats by the Scottish National Party should assuage concerns of a second independence referendum in Scotland for the foreseeable future. Given the role that Northern Ireland and Scotland played in the recent election, these countries are an emphasis in this month’s Europe Watch.
Asia Pacific Watch - July 2017
We estimate that New Zealand makes up barely 1% of the global investable universe of property and MSCI estimates that by GAV it ranks only 28th of the countries they track globally. Although small in size, its long-term real estate market performance has proven to be outsized. Its two main cities – Auckland, the commercial capital and Wellington, the political capital – both have long-standing MSCI performance indexes. Both cities rank in the global top 12 of the 59 cities tracked by MSCI in terms of their 12-year, all-property unlevered total returns. We also rank New Zealand as the country with the 2nd lowest market risk globally (after only Switzerland) when placed in our RARE framework (which equally-weights the cyclical and structural macro-economic and property risks). This is consistent with several other rankings globally where New Zealand performs well: it is rated as the world’s least corrupt nation in Transparency International’s 2016 Corruption Perceptions Index; it ranks 1st globally in terms of the 2017 Ease of Doing Business rankings by the World Bank Group; and it ranks as the 3rd freest economy in the world according to the latest (2016) Index of Economic Freedom undertaken by the Heritage Foundation/Wall Street Journal. For what New Zealand lacks in size and market depth, its risk and return attributes strengthen its investment case.
Combined Watch Link