Real Estate Outlook for June 2018
China responded firmly to the US tariffs, publishing its own list of retaliatory tariffs, also worth about $ 50 billion. President Trump responded to China’s retaliation by threatening to slap tariffs on another $ 200 billion of Chinese imports. China, in turn, threatened to retaliate “vigorously” with “strong countermeasures.” Real estate investors’ hopes that threats from the US administration were part of a negotiating strategy that would eventually lead to a deal are now fading, and risks are increasing that the current tit-for-tat game between the US and China could become a spiral. full-fledged trade war.
This development has its risks. Higher and rising tariffs often mean higher import prices, leading to higher consumer prices. This reduces domestic demand by slowing consumption growth and demand for foreign goods, which in turn depresses real estate markets. Lower demand implies a slowdown in corporate earnings growth, resulting in a revaluation of property prices. In addition, companies are beginning to adapt and may stop future investment projects. The likelihood of this materializing has increased significantly in recent weeks.
With increasing uncertainty about future economic prospects and therefore future corporate earnings, we are reducing our allocation to real estate investments as the global economy continues to be able to cope with the current impact of these tariffs on world trade and world economic growth.
As a rough estimate, every USD 100 billion of imports affected is equivalent to approximately 0.5% of world trade and represents 0.1% of world GDP. With US $ 230 billion of US and Chinese imports currently affected, world trade may fall by around 1 percentage point and reduce world GDP growth by around 0.25 percentage points. Furthermore, a negotiated agreement between the United States and China is still on the table and cannot be ruled out. However, trade tensions may need to worsen before they improve: ending the “war” might require proof that trade actions and rhetoric have costs – that is, evidence of pain in markets and the economy – before that both parties are encouraged to change tactics. . Therefore, it seems prudent and prudent to reduce risks.
Some of the hurdles are likely to be temporary, such as the recovery to unusually rapid growth in the second half of 2017, when the US economy surged by more than 3%. Adverse weather shocks in the US have temporarily affected economic momentum, but should stimulate economic growth in the second quarter due to strong suppressed demand.
While the positive effects of the US tax reform should increase throughout this year, cloudy business sentiment should prevail due to trade tensions that may prove difficult to resolve, as well as tightening financial conditions. .
We have begun to see the effects of this trade “War”. The performance of the US apartment market stumbled during the first quarter of 2018. Occupancy fell to 94.5 percent in March, down from 95 percent a year earlier, according to the technology and asset analysis firm. RealPage Estate, Inc. Annual rental growth slowed to 2.3 percent, the slowest rate of increase since the third quarter of 2010.
“While some loss of momentum in apartment market performance is normal when cold weather across much of the country discourages household mobility, the decline in occupancy in early 2018 is pronounced,” said the chief economist of RealPage, Greg Willett. “With so much new supply up and running, even a short period of slow demand can cause real damage. It is difficult to maintain pricing power in such a competitive leasing environment.”