Negative Interest Rates And Their Positive Impact On CRE

Includes: IYR, RINF
by: Llenrock Group

Negative interest rates may seem like an unfathomable possibility for some, especially because of the most recent rate hike here in the U.S. However, due to falling oil prices, some countries are turning to having depositors get paid to hold money in their bank accounts. Yes, you heard me right.

Case in point: Sweden. On February 11th, Sweden's Central Bank lowered its lending rate to -0.5% from a previous -0.35% in order to try and boost the country's economy. But how would negative interest rates help the economy exactly? Wasn't the rate hike in the U.S. supposed to be a sign of a strong economy? According to The New York Times:

"Lower rates encourage business investment and consumer spending; increase the value of the stock market and other risky assets; lower the value of a country's currency, making exports more competitive; and create expectations of higher future inflation, which can induce people to spend now."

Indeed, lowering rates does lead to a lower value in that country's currency: Sweden's currency fell by 1pc against the euro. This, in turn, brings joy to export industries. But while Sweden's decision on lowering interest rates has helped to "strengthen the economy and reduce unemployment," according to the central bank, economists aren't certain that this method is a simple solution to a bigger, more complicated problem. Jessica Hines, an economist at Capital Economics, told The Telegraph:

"There is little sign that inflation will pick up any time soon while surveys of business and consumer inflation expectations are not reassuring."

Well, Sweden isn't alone when it comes to lowering their interest rates. The Bank of Japan recently made the decision to pay negative interest while expanding its purchases of REITs: a good sign for Tokyo commercial real estate!

GLP J-REIT reported last week that it made a fixed cost deal with Nomura Securities Co. on 5.3 billion yen ($46.4 million) of debt. At a rate of -0.009%, the REIT will get around 480,000 yen a year in net through this venture. Higher-class property companies can benefit quite a bit from these negative interest rates. Mashiro Mochizuki, an analyst at Credit Suisse, explained to Bloomberg:

"With the drop in interest rates, we are likely to see an increase in money pouring into real estate. Regional banks must make profits somehow and they can't make money lending, so they need to invest in property funds."

But what kind of real estate is expected to benefit? Mochizuki says that prices for class A Tokyo offices are expected to rise by 10%, at least, this year - enabling investors to make an even greater profit off of real estate than on Japanese government bonds. As more money is thrown into Japanese REITs (a projected 4.5 trillion yen this year alone), office rents are set to rise 10% this year, according to JLL. In January, vacancy rates in Tokyo's business district fell to the lowest they have been since 2008.

The lowering of interest rates are not only benefiting REITs - investors are jumping fast and seeking opportunity as well. Bloomberg reported that Japan's second-largest property developer, Mitsui Fidosan Co., saw a 9% gain in trading "after reporting a 35% gain in net income to 95.2 billion yen in the nine months to the end of December."

But what about the U.S.? Yes, ethnocentrism is alive and well in our country. Will we follow Switzerland, Sweden, and Japan and hop on the train of negative interest rates? American economist Janet Yellen doesn't think so, but she still leaves it as a possibility. Yellen did put into question the legality of negative interest rates, exclaiming in a testimony last week that it "remains a question that we still would need to investigate more thoroughly." So, she hasn't dismissed the idea entirely. She also seemed hesitant on her stance of whether or not our country's money markets and institutional structure could handle it.

Pretty much, don't expect negative rates in the U.S. anytime soon. I figure policymakers here in the U.S. will watch how other countries fare with the concept and, more importantly, if countries with similar institutional economic structures and markets actually benefit from negative rates. There you have it: a quick overview of the complex (positive and negative) possibilities of negative interest rates.