June 24 – June 30, 2016 – the janus observer

Japanese banks wary of property risks. Negative-yielding sovereign debt jumps to $11.7tn.

This week all the media outlets were blanketed with coverage on the Brexit and of course the synopsis varied from catastrophe (a lot of money was lost in the equity markets around the world immediately – which have already made up a lot of lost ground), to concern over the survival of the European Union, to a general ‘meh.’ Remember, the world moves on. Importantly, Britain is still part of the EU. No one has triggered Article 50 of the Lisbon Treaty yet and even when Britain does trigger the article, there is a two-year exit process with the EU. As such, some even think that Britain may not eventually leave. So for now as the Brits like to say, keep calm and carry on.

Headlines

The Real Deal – Anbang to close Waldorf Astoria for three years during $1B condo conversion 6/27. After paying $1.95bn for the hotel in 2014, Anbang is going to close a portion of the property for up to three years to convert 1,100 out of 1,400 rooms into condos at a cost of $1.1bn.

Briefs

Hudson Lockett of the Financial Times drew attention to Moody’s Investor Service having called a peak for China’s home sales growth.

“Moody’s Investors Service is predicting that China’s property markets are facing a double-whammy of growing margin pressures for developers and tapering growth in home sales nationwide.”
“The rapid growth in land costs will raise the developers’ capital requirements and will also likely add margin pressure in the next 12-24 months. Furthermore, developers that acquired land with high unit costs in major cities will face increased business risks, given our expectation that price growth in these cities will moderate.” – Dylan Yeo, Moody’s analyst
“The report from Moody’s follows a note from S&P Global Ratings last week reiterating expectations for growing bond defaults onshore in China, with those for property developers forecast to have the biggest potential impact.”

The Economist provided an interesting piece on the fast, bizarre, and relatively chaotic ways in which the great cities of Africa and Asia are growing.

“Between 2005 and 2015 the world’s cities swelled by about 750m people, according to the UN. More than four-fifths of that growth was in Africa and Asia; specifically, on the fringes of African and Asian cities. With few exceptions, cities are growing faster in size than in population. Lagos, the capital of Nigeria, is typical: it doubled in population between 1990 and 2010 but tripled in area. In short, almost all urban growth is sprawl.”
“London took two millennia to grow from fewer than 30,000 people to almost 10m; Shenzhen in China managed that within three decades. And most African and Asian cities are growing more chaotically.”
“Like it or not, this is how the great cities of the 21st century are taking shape.”
“Shlomo Angel of New York University has studied seven African cities in detail: Accra, Addis Ababa, Arusha, Ibadan, Johannesburg, Lagos, and Luanda. He calculates that only 16% of the land in new residential areas developed since 1990 has been set aside for roads – about half as much as planners think necessary. And 44% of those roads are less than four meters wide.”

Laura Kusisto of the Wall Street Journal highlighted that yes, today’s renters really are worse off than their parents.
- “Inflation-adjusted rents have risen by 64% since 1960, but real household incomes only increased by 18% during that same time period, according to an analysis of U.S. Census data released by Apartment List, a rental listing website.”
- “Renters fared the worst during the decade between 2000 and 2010, when inflation-adjusted household incomes fell by 9%, while rents rose by 18%, according to Apartment List.”
- In regard to inflation “…housing still largely relies on U.S. labor and materials (and zoning restrictions), making it one of the few essentials that haven’t become cheaper with globalization.”
Claire Jones and James Shotter of the Financial Times reported on the IMF’s recent opinion that Germany do more to reform its banks.
- “The International Monetary Fund has warned that ultra-low interest rates pose a threat to the profitability of Germany’s €13tn financial sector, as it steps up its call for the country’s banks and insurance groups to restructure.”
- “The IMF has supported the ECB’s aggressive monetary easing and indicated that the onus was on German banks and their regulators and supervisors to reform.”
- “Given its high share of savings and co-operative banks – whose business revolves around taking deposits from and making loans to local communities – the German banking system is highly dependent on interest rates.”
- “A study by BaFin, the German financial watchdog, and the Bundesbank last year found that Germany’s 1,500 small and midsized banks expected profits to fall by an aggregate of 25% by 2019, mainly owing to the collapse in net interest income. The study projected that if rates fell a further 100 basis points, lenders’ profits would plunge at least 60% by the same date.”

Special Reports

Graphics

FT – Fed on alert for US economic recoil – Sam Fleming 6/24

FT – Unicorns: Between myth and reality – Richard Waters and Leslie Hook 6/27

Bloomberg – San Francisco Landlords Gird for Slowdown as Startup Frenzy Ebbs – Alison Vekshin 6/28

Economist – Foreign direct investment 6/25

WSJ – Today’s Renters Really Are Worse Off Than Their Parents – Laura Kusisto 6/29

Featured

*Note: bold emphasis is mine, italic sections are from the articles.

Overheating Risk Makes Japanese Banks Wary of Property Lending. Tesun Oh Katsuyo Kuwako. Bloomberg. 27 Jun. 2016.

“Japanese banks are reining in their exposure to the property market on concern the central bank’s negative-rate policy is fueling overheating.”

“We’re watching the market carefully because we get a strong sense that the market is being pushed up mainly by a lot of lending.” – Michiya Fujii, head of the real estate finance department, Tokyo Star Bank, Ltd.

“Lending to the real estate sector rose to a record high in March, exceeding levels during Japan’s asset bubble in the late-1980s, according to Bank of Japan data.”

When you look at the options for income investors you can understand why. “While the average expected yield for central Tokyo office property fell to 3.7% in the first quarter, its lowest since at least mid-2007, that is still 82 times the 0.045% yield an investor can earn from buying 20-year government debt. Ten-year yields have dropped 10 basis points this month to minus 0.22%.”

“Considering the downside risks, this is not a time when we can aggressively lend. What’s important is, when the time comes and the market turns, how much durability we’ve built into the portfolio.” – Katsumi Taniguchi, head of the planning team of the real estate finance department at Sumitomo Mitsui Trust

Additionally, while rates are low real estate investment trusts and large developers are taking advantage of the opportunity to lower their borrowing costs. “Nippon Building Fund Inc., Japan’s largest REIT, sold 30-year debt this month at a coupon of 1%, while the largest developer Mitsubishi Estate Co. issued 40-year bonds at 0.789%.”

Negative-yield government debt surges $1.3tn to $11.7tn Adam Samson. Financial Times. 30 Jun. 2016.

“The universe of negative-yielding government debt has increased by more than $1tn in the last month to reach a high of almost $12tn in one of the most tangible results of Britain’s decision to leave the EU.”

“Low sovereign bond yields reflect gloomy economic outlooks and expectations of central bank stimulus. In turn a record $11.7tn of global sovereign debt has now entered sub-zero territory – an increase of $1.3tn since the end of May, according to data released by Fitch Ratings.”

“You have to look at the response by central banks after the Brexit shock. You’re seeing a ubiquitous tilt toward easing among G4 central banks (Federal Reserve, European Central Bank, Bank of Japan, and the Bank of England).” – Ben Mandel, a global strategist at JPMorgan Chase

Because of this, “futures markets suggest investors saw a roughly 75% chance that the Federal Reserve will not raise interest rates over the next 12 months.”