The conventional wisdom is that the Fed will allow interest rates to begin to increase later in the year. If that’s the case, why are ten-year U.S. Treasuries declining, reaching an intraday low of 2.35 percent, a rate not seen since last June?
We think the answer is sort of obvious—at least on a short-term basis. Investors—local, regional, national, and even global—have decided to go “risk off” for the moment, exchanging some portion of their current investment portfolio for the “safety” and “liquidity” available from investing in U.S. government securities while they wait for resolution of the myriad of today’s geopolitical hotspots.
Some Common Sense . . . and Doing the Right Thing
Two weeks ago, we wrote about “CoCos”—a new type of financial instrument issued by Eurozone banks. CoCo is the acronym for a contingent convertible bond, which converts from debt to equity in the event the issuer’s capital levels decline. The Financial Times referred to CoCos as “rinky-dink” instruments.
Last Tuesday, Britain’s Financial Conduct Authority prohibited banks from selling this financial paper to retail (individual) investors, noting, “In a low interest rate environment, many investors might be tempted by CoCos offering high headline returns. However, they are complex and highly risky.”
Complex? The following was part of a financial services firm’s blog entry from earlier this year:
“The host instrument for a CoCo can be a T2 instrument with mandatory coupon language and a fixed maturity date, or a Tier 1 non-step perpetual with a call date that tends to range from 5 to 10 years and fully discretionary coupon features.”
If that is the best the industry can do to remove the jargon and clarify and simplify the investment, then maybe the ban should be made permanent immediately.
The Best of Intentions
First conducted among its European clients in 2010 and then extended to include clients from North America and the Asia Pacific region in 2014, CBRE’s Investor Intentions Survey measures the intended investment behavior of a wide array of real estate industry participants. This year’s online survey received 743 responses.
Key takeaways were as follows:
- Investors from all three regions expect to continue to actively participate in the investment markets in 2014, with two-thirds anticipating to be net buyers in 2014.
- Globally, investors are continuing to focus attention on the industrial and logistics sector; however, supply is unlikely to be sufficient to meet demand driven by the increase in e-commerce as well as a shift to consumption-based demand in Asia.
- Investors expressed concern that there are “too many people, with too much money and too few deals” trying to access the real estate space; to be competitive, investors are turning to secondary markets.
- Threat assessment varies among the regions: North America responses focused on the actions of the Federal Reserve and the risks associated with rising interest rates; Asia Pacific responses focused on the region’s economy and the risks associated with the sustainability of growth in China; European responses highlighted concern about the Eurozone’s economy and the possibility of a “pricing bubble” in select, overheated markets.
The Trepp survey for the week ending August 1, 2014, showed average spreads continuing to widen as much as 3 basis points; the implied rate for ten-year, modestly leveraged commercial real estate mortgages increased to 3.83 percent—81 basis points below its level on December 31, 2013.
Asking Spreads over U.S. Ten-Year Treasury Bonds in Basis Points
The Cushman & Wakefield Equity, Debt, and Structured Finance Group’s monthly Capital Markets Update of commercial real estate mortgage spreads, dated August 7, showed spreads coming in approximately 5 basis points as compared with the prior survey (dated June 10) as lenders continue to compete for business; implied all-in cost ranges from 4.25 percent to 4.50 percent.
Ten-Year Fixed-Rate Commercial Real Estate Mortgages (as of August 7, 2014)
|Multifamily (agency)||75–80%||T +160||T +170|
|Multifamily (nonagency)||70–75%||T +155||T +160|
|Anchored retail||70–75%||T +175||T +185|
|Strip center||65–70%||T +175||T +185|
|Distribution/warehouse||65–70%||T +175||T +185|
|R&D/flex/industrial||65–70%||T +185||T +190|
|Office||65–75%||T +175||T +185|
|Full-service hotel||55–65%||T +235||T +255|
|Debt-service-coverage ratio assumed to be greater than 1.35 to 1.|
Year-to-Date Public Equity Capital Markets
Dow Jones Industrial Average: –0.14 percent
Standard & Poor’s 500 Stock Index: +4.50 percent
NASD Composite Index (NASDAQ): +4.65 percent
Russell 2000: –2.77 percent
Morgan Stanley U.S. REIT Index: +12.02 percent
Year-to-Date Global CMBS Issuance
(in $ billions as of 7/25/14)
|Source: Commercial Mortgage Alert.|
Year-to-Date Public U.S. Treasury Yields
U.S. Treasury Yields