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SG Asia to benefit after Fed taper move

Property Here - Monday, December 23, 2013

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Asia’s real estate markets are expected to see positive implications following the US Federal Reserve's announcement that it will reduce monthly acquisitions of mortgage-backed and treasury securities from US$85 billion to US$75 billion starting in January 2014, revealed CBRE Research.

The market has been plagued with uncertainty since the Federal Reserve announced that it might start tapering at some point in 2013. Perceived as business friendly, last week’s announcement clarifies that the extent and rate of tapering will both be moderate.

“Overall, the clarity around the Fed’s announcement will allow firms to make business decisions that may have been on hold for the past few months,” the consultancy said. 

“We expect this to play out particularly in Asia in 2014 and eventually provide support to the rental market as firms seek to grow. There will be around a six to 12 month-lag before we see the impact on rentals from the improvement in business sentiment.”

“CBRE Research maintains its view that the Asia Pacific region be the primary focus for global corporate expansion due to comparatively robust fundamentals of steady urbanisation, rising wealth and favourable demographics.”

For capital markets, global interest rates will likely remain low while future increases are expected to be gradual and cautiously tied to the rate of recovery considering that “bond yields have reacted mildly to tapering plans and the Fed expects to keep the Fed funds rate at zero for the foreseeable future”. 

Over the longer term, US interest rates are expected to normalise exerting upward pressure on interest rates for markets like Singapore and Hong Kong which rely heavily on foreign trade and have no capital flow restrictions. This will ultimately push up yield and return expectations on real estate investments.

Property valuations in Asia could also be affected by rising cap rates. However, the impact on property prices could be partly offset if improving fundamentals feed through into rising rents.

But given the likely extension of the Fed's zero rate, excess liquidity will continue to be the dominating factor in determining asset prices in Asia, at least over the next 12 months. Property yields are therefore likely to remain low over this period.