This article is republished with permission from REITCafe.
International economic forces have taken center stage this week, affecting both U.S. stock markets and real estate investment trusts (REITs). The crash in the Chinese stock market and ongoing concerns about the future of Greece in the Eurozone drove markets down during the first half of the week. REITs fared better than the overall market, with a –0.53 percent total return on Wednesday of this week versus the Dow Jones Industrial Average (–1.47 percent), Standard & Poor’s 500 (–1.64 percent), and NASDAQ (–1.75 percent). U.S. REITs hold few direct assets in these areas, so the primary concern relates to China’s and Greece’s impact on the U.S. economy, interest rates, and investment.
China’s stock market has lost about 30 percent of its value since it peaked in June. On Wednesday, panic selling erupted, more than 1,300 companies halted trading in their shares, and the Shanghai Composite Index fell 5.9 percent. Government moves to cut interest rates, arrange $19 billion in purchases from fund managers, and stop initial public offerings (IPOs) slowed—but did not end—the selloff. Chinese investors have lost billions of dollars, creating concern about the impact on consumer spending. Trading partners, including U.S. companies that sell products to the Chinese people, will be significantly affected by the downturn.
| TREPP-i Survey Loan Spreads (50–59% LTV)* |
| This Week | Previous Week | Previous Month | End 2014 | End 2013 | |
| Industrial | 140 | 139 | 151 | 138.5 | 170 |
| Multifamilty | 143 | 141 | 148 | 139.8 | 166.7 |
| Office | 146 | 145 | 155 | 148 | 175 |
| Retail | 142 | 141 | 152 | 139.8 | 175 |
| Average Spread | 142.75 | 141.5 | 151.5 | 141.5 | 171.7 |
| 10-year Treasury Yield** | 2.41 | 2.39 | 2.40 | 2.17 | 3.04 |
The Chinese have invested significantly in U.S. commercial real estate assets, especially trophy properties like New York City’s Waldorf Astoria hotel. Will this investment continue? The stock market decline may lead to less investment, because of money lost as stocks have fallen, and future for-sale properties may achieve lower valuations if the Chinese are no longer competing for assets. More likely, however, is that Chinese investment in U.S. real estate will grow because U.S. properties will be viewed as a safe haven compared with volatile domestic markets.
On the other side of the world, Greece’s bailout program expired on July 1, and the country missed a scheduled payment to the International Monetary Fund. The country is negotiating a new agreement with creditors, but reaching a deal for an additional bailout became more unlikely when the local electorate voted by a large margin to reject European austerity demands.
Greece’s problems are not new, although the probability that Greece will exit the Eurozone has increased. Investors worry that Spain and Italy could follow Greece out of the Eurozone. Concern also exists about a global banking crisis if Greece leaves the Eurozone. While the concern is real, the consequences are less dire than they would have been several years ago when the economies of Eurozone nations were much weaker.
For investors, this week’s events in China and Greece may have created a REIT buying opportunity by encouraging the Fed to put off raising interest rates. REIT stocks have been beaten down this year because of concern about rising interest rates. This week’s events are making the Federal Reserve more cautious, which could cause it to delay its timeline. Putting off the rate hike would benefit REITs that rely heavily on borrowing. It would also mean that investors will keep their money in REITs as they continue to look for yield.
The case can also be made that recent events in China and Greece will not cause the Fed to alter its rate hike plans. Even after the market fall, Chinese stocks are trading well above their year-ago levels. In addition, Greece’s overall economy is small, and without a contagion effect, it is unlikely to significantly affect world markets—especially, as previously noted, since European economies and banks have strengthened in recent years.
The impact of this week’s events on REITs will ultimately depend on economic trends and interest rate movements. While the jury is out, investors should be cautious about fallout from these events.
* 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 7/10/2015.
