#Real Estate — 19.10.2017

What About Trumponomics, Retail Woes And The Logistics Sector In The US?

Pol R. Tansens

All our answers in our Real Estate report: « Is Real Estate Portfolio Diversification Starting To Pay Off? »

It remains to be seen whether President Trump’s campaign rhetoric with regards to issues such as trade protectionism, infrastructure spending and lower taxes, will effectively materialise, or whether his economic strategy will be watered down in the political (and even legal) process.

Actually, financial markets have started doubting the feasibility of the US President’s plans, with the greenback having nosedived by 15% against the euro since 20 December 2016 (1).

That said, currency movements (hence risk) are equally important to property investors wishing to benefit from the anticipated upward currency movements. Nonetheless, BNP Paribas Wealth Management expects the US dollar to strengthen against the euro by roughly 8%, forecasting a EUR/USD exchange rate of 1.10 in 12 months (2).

Another impact of the US President’s economic policy would be on long-term nominal interest rates (not exclusively in North America). We will examine this issue in more detail in this report. Meanwhile, Europe has outstripped the US in terms of economic growth projections.

Retail woes in the US (and increasingly in other parts of the world)

Undeniably, traditional retail stores have been seriously squeezed by the growing e-commerce activity in the US. Retailers are shutting up shop at a staggering rate. About 2,000 store closures have been announced in recent weeks and months, bringing the total number of planned closures this year to nearly 5,100 (3). Furthermore, Credit Suisse estimates that the number of closures could rise to 8,640 by the end of 2017, and expects 20-25% of malls (or roughly 220-275) to shut down over the next five years. While growth in online shopping has negatively impacted foot traffic at some brick-and mortar stores, credit rating agency Fitch estimates that 70% of retail sales will be generated in physical (walk-in) stores in 2020, down from 80% today (4).

The logistics sector in high demand

Indeed, the logistics sector continues to be underpinned by structural changes such as online retailing. In 1Q17 prime logistics rents continued to edge up by 2.2% in global markets (based on 70 global hubs tracked by CBRE Research, Global Industrial & Logistics Rents, July 2017). US coastal hubs, such as Seattle and Pennsylvania’s Interstate 78/Interstate 81 Corridor, delivered exceptional growth in rental values (+16.9% and +10% respectively). Furthermore, some ‘in-land’ markets witnessed significant progress as well, with Atlanta and Chicago posting surges of 9.2% and 5.6%, respectively.

Demand stayed rather strong for logistic assets in Chinese coastal and tier-one markets, with Suzhou, Hangzhou, Ningbo, Wuxi Nanjing and Shenzhen reporting rental growth of over 5% (though growth in rental values was more moderate elsewhere in the country). Europe is performing very well too, even though gross initial yields carried by existing logistic assets are very low (thus expensive). This has led to strong property development activity, particularly in the UK, where schemes must offer lower rents to attract tenants (5).

Watch our Head of Real Estate Investment Strategy explain more about Trumponomics.

(1) Source: xe.com, 30 August 2017

(2) Source: BNP Paribas Wealth Management, 1 September 2017

(3) Source: Business Insider, 3 June 2017

(4) Source: Fitch, 8 June 2017

(5) Source: CBRE Research