PERE Summit Asia: emerging markets, HK most vulnerable to QE tapering

Emerging markets and Hong Kong are expected to be impacted the most by the US government's tapering of quantitative easing (QE) with rising interest rates and volatile currencies slated to cause the pain for private real estate investors, delegates heard at the PERE Summit Asia in Hong Kong.

Just the simple suggestion that the US would reduce its quantitative easing measures last year was enough to create currency volatility in emerging markets, according to CBRE Global Investors Asia-Pacific director for research and strategy Shane Taylor, and some countries have had to react immediately and decisively.

For example, last month Turkey raised its overnight lending rate to 12 percent from 7.75 percent and the overnight borrowing rate to 8 percent from 3.5 percent. While that was not great news for real estate leverage in the country, Turkey’s move did strengthen its currency after it had been falling against the dollar.

The panel discussed how quantitative easing had previously enabled investors to access cheap debt and that has been made available for investments in real estate around the world.

“As soon as the tapering was announced, there was a flight out of real estate and alternatives – especially in emerging markets – back to US stocks and bonds,” Ledger said on the panel. Over the past six months, the Federal Reserve has lowered its monthly stimulus by $20 billion from its original $85 billion per month. Meanwhile, the US government has suggested it would keep its interest rate low for the short term but that it will eventually rise once again.

As such, those markets with currencies pegged to the US dollar, such as Hong Kong, are going to be most vulnerable, because they will need to increase their rates alongside the US.

“But the places most affected in the region are likely to be emerging markets,” Taylor said. “They will have to raise interest rates because inflation is one of their greatest fears, as the cause of middle class erosion.”

Regardless of the outcome for real estate, Ledger pointed out, however, that tapering will have a more volatile effect on the equities market. Real estate in general is a “slower” asset class, he said, and usually takes longer to react to market changes, so Ledger doesn’t expect any major shift in cap rates in the near future.

Taylor warned: “Any investor sitting on the sidelines waiting for a 200 basis points cap rate decompression will be very unlucky. There is a weight of capital [in emerging markets] that will not allow decompression that high.”