It’s getting predictable isn’t it? The Donald tweets, the rest of the world reacts and equity markets shudder. Blame the 24-hour news cycle, event driven macro traders, fake news or almost anyone with an opinion (in my opinion).
The latest episode of Global Hysteria is a Trump trade war with China. The narrative runs like this: Trump imposes trade tariffs on China, retaliation ensues and global GDP plummets. The closing scene is the Federal Reserve slashing interest rates to prop up an ailing US economy.
This seems unlikely. The reason why we hear so much about Trump-induced panics is because reporters get paid to write about them. As for the ‘experts’ on Bloomberg TV, they have a dog in the fight. Usually US hedge funds shorting the Yuan, they profit from jawboning markets.
Running a Fund focused on real estate investment trusts in Asia (REIT), we often get asked our view on how a trade war will affect Asian commercial real estate. The short answer is “not much”.
Real estate is a local game. The primary determinant of rents, whether it be a new shopping centre, office building or industrial warehouse, is supply.
This is what makes commercial real estate cyclical. Whilst demand is dynamic, supply, at least in the short term, is static. A new office building can take upwards of three years to complete. In the meantime, if other buildings are being released to market, landlords typically respond to an increase in supply by reducing rents.
As for demand, it is very much linked to GDP growth. Falling exports can inhibit economic growth, and with it rental growth. Given this theoretical background it’s tempting to draw an adverse conclusion about the impact of a US/China trade war on commercial property in the Asian region.
The reality, however, is more nuanced. Japan, Singapore and Hong Kong – the developed Asian markets in which APN’s Asian REIT Fund invests – all run current account surpluses, meaning their economic growth is export-led. Potentially, this could make them vulnerable in a Trump-led trade war.
Either Trump targets each country directly by imposing trade tariffs, or he keeps his focus on China, with the reverberations felt across the Asian region, causing an indirect impact.
It all started with a warning shot; Trump kicked off trade negotiations by announcing tariffs on steel and aluminium.
This makes sense, thus far, Trump’s political strategy has been to revitalise the country’s manufacturing base by raising the cost of imported raw materials, which are easily substituted by domestic materials.
What came next was a bombshell. In June, Trump announced a blanket 25% tariff on ‘industrially significant technologies’ imported from China. This includes components used in industrial machinery, electric motors, television & camera components, among many others.
This caused a collective shudder across the entire Asian region, those type of products are the staple of developed Asia’s exports. To illustrate, here are the top five exports to the US from the three countries which are the focus of the Asian REIT Fund: