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UBS: Japan negative interest rates a boon for RE

The impact of negative interest rates will be positive on real estate pricing, fundamentals and capital flows, according to fresh research from the Swiss bank.

The Bank of Japan's (BoJ) decision to introduce negative interest rates at the start of the year is positive for the real estate industry, despite financial markets' capricious reaction to the monetary policy, said a research paper from UBS.

While preliminary figures from property consultancy JLL said transaction volumes in Japan dropped to just below $10 billion in the first quarter of 2016, down from nearly $13 billion in the same period last year, the Swiss bank said that overall the monetary policy was good for real estate.

According to the research paper the positive impact of negative interest rates on real estate pricing, fundamentals and capital flows will generally take place via: interest rates, credit availability and currency impact.

On pricing, the paper said that despite increased financial market volatility and a pullback in investment transactions in Q1, prime property yields across all sectors were broadly stable in Tokyo. The stability of pricing was in part due to the decline in yields on risk free assets and lower debt servicing costs, both of which are the direct result of the introduction of negative interest rates.

The decline in interest rates also reduces the interest burden on leveraged real estate investors, said UBS. This is likely the case for core exposure as Japanese lenders compete for the best assets and investors which should continue to pressure lending margins.

Overseas real estate investing is also anticipated to pick up as negative interest rates push domestic returns lower. Although to date the risk adverse nature of Japanese institutional investors has meant the out pour of capital has yet to be seen.

“The combination of quantitative easing and [negative interest rate policy] is pushing returns lower in Japan and reinforcing the case for domestic investors to increase their global real estate exposure. Exposure to global markets would help institutional investors meet current and future obligations that continue to climb as dependent numbers swell,” said the paper.

The BoJ's decision to adopt negative interest rates led to some unanticipated consequences, such as a surging currency.  Expected to fall, the yen surged to an 18-month high against the US dollar and appreciated against all 15 other major global currencies in 2016. But, a stronger yen should help support the exposure to global markets, said UBS.