This article is republished with permission from REITCafe.
Concerns that China’s government will be unable to maneuver a soft landing for its flagging economy wreaked havoc on global stock markets last week. Earlier this month, the yuan was devalued by about 3.5 percent against the U.S. dollar in an attempt to boost exports. China’s central bank also cut interest rates by 0.25 percentage point and lowered the amount of deposits that banks are required to hold.
U.S. stock markets turned dramatically lower during much of the past week, but markets ended the six-day downturn by surging ahead on Wednesday and posting additional gains on Thursday. Positive economic news on U.S. second-quarter gross domestic product (GDP), consumer confidence, and home sales indicated that the domestic economy should be able to withstand the slowdown in China.
| TREPP-i Survey Loan Spreads (50–59% LTV)* |
| This Week | Previous Week | Previous Month | End 2014 | End 2013 | |
| Industrial | 165 | 158 | 139 | 138.5 | 170 |
| Multifamily | 161 | 154 | 141 | 139.8 | 166.7 |
| Office | 173 | 165 | 145 | 148 | 175 |
| Retail | 165 | 158 | 141 | 139.8 | 175 |
| Average Spread | 166 | 158.75 | 141.5 | 141.5 | 171.7 |
| 10-year Treasury Yield** | 2.18 | 2.05 | 2.25 | 2.17 | 3.04 |
Immediately following the devaluation of the yuan, real estate investment trusts (REITs) outperformed broader stock indices. As China-related worries began to affect REIT markets, the sector experienced a more severe downturn during much of the past week.
One of the most important outcomes of this week’s stock market activity for REITs relates to interest rates. Faltering markets lent credence to the belief that the Fed would postpone an increase in interest rates. The late-week rebound may have made a near-term rate hike delay less likely.
A downturn in China could also affect the U.S. economy, job growth, and real estate. Since the recent actions taken by China’s government suggest that the economic situation is worse than previously thought, demand for U.S. exports will likely slacken. Less capital coming from China could have a longer-term impact on the U.S economy.
On one hand, devaluing the yuan reduces investors’ purchasing power and makes U.S. real estate more expensive to the Chinese. Fewer investors will bring money overseas, which would result in less competition for acquisitions, as well as lower property valuations. But a more likely outcome is that fears of further devaluation could lead to an outflow of capital from China, in which case investment and prices would stay stable or accelerate.
Several U.S. REITs have direct investments in China. Share values fell and then recovered some of their losses this week, making it difficult to tell if these equities were acting in conjunction with the broader markets, or if Chinese investments affected their share prices.
- China is a small but growing part of Prologis’s operating portfolio, representing 0.9 percent of its total square footage. Prologis has a 38 percent ownership stake in its operating portfolio in China, which includes 37 buildings totaling 8.5 million square feet (790,000 sq m) of logistics and distribution space as of midyear 2015. The company also owns 15 percent of a development portfolio in China that totals 9.9 million square feet (920,000 sq m), much of which is scheduled for delivery in 2016 and beyond, and land that could accommodate another 4.9 million square feet (455,000 sq m). Just this week, Prologis announced leases for 926,000 square feet (86,000 sq m) in three Chinese markets.
- Through its subsidiary Taubman Asia, Taubman Centers has three China shopping malls scheduled to open before the end of 2016. Taubman Asia has partnered with Beijing Wangfujing Department Store and owns about 30 percent of two 1 million-square-foot (93,000 sq m) malls that will open in 2016 in Xi’an and Zhengzhou. Taubman Asia also partnered with Melco Crown Entertainment for the Boulevard at Studio City property in Macau that is scheduled to open in late October.
The slowdown in China is reverberating through the U.S. economy and REIT market, affecting a number of property sectors, including retail, industrial, office, lodging, and even gaming. Recent tumultuous trading sessions have left REITs down slightly more than the broader stock markets, which have left investors anticipating a longer-term effect from China on the U.S. economy and commercial real estate market.
* TREPP-i Survey Loan Spreads levels are based on a survey of balance sheet lenders. For more information, visit Trepp.com.
** - 10 yr. Treasury Yield as of 08/28/2015.
