Can’t Trump this: How commercial property fares in a China/US trade war

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:

top 5 exports

Source: OCE 2018

However, this needs to be viewed in the context of Trump’s geopolitical strategy. These tariffs are specific to China as Trump views China as a threat to its economic power. Trump wants the US to remain a world leader in technology and stifling China’s home-grown industries by crimping exports is one way to do this.

The problem is, unlike steel and aluminium, these goods aren’t easily substitutable. Raising tariffs on high spec machinery that the US cannot produce itself could have serious adverse impacts on US business.

So where to source it? Perhaps from countries that Trump isn’t politically at war with. Rather than be crimped by a trade war, perhaps we might see the rest of Asia increase their exports to the US to pick up the slack.

The one outlier is Japan, with its emphasis on vehicle exports. With a well-established auto industry, it’s possible that Trump could impose tariffs to give the country’s ailing industry a leg up, a threat he has recently made.

Even here though, there’s less reason for concern. Our Japanese logistics investments do not cater to the Japanese auto industry. Auto manufacturers produce vehicles and send them directly to ports, where they are stored before being loaded onto ships for export, bypassing the traditional warehouse facilities in which we prefer to invest.

Of course, we’ll continue to see bumps in the stock market as the Trump Trade narrative gets rehashed for the umpteenth time. What we can confidently say is that the commercial property market isn’t buying into the short-termism.

Right now, commercial rents are on an upswing in Singapore, the Hong Kong office market continues to break transaction records and Tokyo recorded a low commercial vacancy rate of 2.57% in June.

We’ve long argued that investing in Asian commercial property offers exposure to Asian growth without much market volatility. Recent events support that thesis.

We’re more than happy to leave Trump as fodder for the late-night talk show hosts and focus on the long term bigger picture, which happens to be far more attractive than most commentators would have you believe.

This article has been prepared by APN Funds Management Limited (ACN 080 674 479, AFSL No. 237500) for general information purposes only and without taking your objectives, financial situation or needs into account. You should consider these matters and read the product disclosure statement (PDS) for each of the funds described in this article in its entirety before you make an investment decision. The PDS contains important information about risks, costs and fees associated with an investment in the relevant fund. For a copy of the PDS and more details about a fund and its performance click here. To receive further updates and insights from the APN team, sign up for Review, our monthly email newsletter.