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​HFF Research Update for February 11, 2016: Stoxx & Bunds

Thursday, February 11, 2016

Weekly insights on current research in the commercial real estate industry from HFF Managing Director of Research Jimmy Hinton. View Daily Rates on the HFF website or access the HFF Daily Rates App in iTunes.

Spellcheck hasn’t failed me; we’re looking abroad today before reflecting in the mirror. As I tap this out, the Stoxx 600, an index of listed corporations across continental Europe and the UK, is down more than 3 percent, or the DJI equivalent of ~475 point decline. Meanwhile, Germany’s 10-year Bund is yielding 20 bps, edging ever closer to zero. Much can change for the rest of the trading day, as it has over trading sessions here in the U.S. for the past several days. Still, there is a feeling European markets are not going to suddenly reverse course.

Analysis of Market Insights and Economic Performance

Sweden’s central bank cut its key interest rate further below zero to a target of -0.5 percent. Societe Generale, France’s second largest bank, missed earnings expectations on lower trading profits and an increased provision for litigation, which sounds eerily familiar to anyone following the U.S. FIG space for the past several quarters.

A European Summit will commence next week. Interested parties will be watching David Cameron, the prime minister of the United Kingdom, who may seek a deal to overhaul Britain’s membership in the organization.

Farther east, many Asian markets are closed for holidays, perhaps thankfully.

Shifting focus to the U.S., Janet Yellen provided testimony to the House Financial Services Committee on Wednesday. Her commentary, while broadly important and widely watched, provided very few surprising insights. For those who prefer the Cliff’s Notes, she essentially lent credit to the notion the FOMC is monitoring global volatility as it will play a significant role in their confidence the domestic labor market and broader economy could digest another hike to that body’s Target Fed Funds Rate. Yellen stopped short of hinting the FOMC would cut rates in the immediate future if conditions worsen. Meanwhile, many are starting to argue whether or not the FOMC has the legal authority to reduce their Target Fed Funds Rate to a level below 0 percent.

The great re-evaluation continues. Changing expectations of future growth is indeed evidencing itself in lower earnings multiples in equities and lower benchmark interest rates.

This has negatively impacted the REIT space, mostly in that it has not allowed their share values to ascend. In other words, even though yield on the 10-year UST has fallen 67 bps since YE2015, market capitalizations have not risen markedly. Why? I believe the market is anticipating lower FFO growth in 2016 so multiples have compressed. In this light, I wish to point out a study Goldman Sachs has released. As you can see below, over the past ~17 years values have been more predominantly driven by net cash flow than by comparison to Net Asset Value or by the multiple investors are willing to pay.

Economic Performance Exhibit 1

Economic Performance Exhibit 2

Economic Performance Exhibit 3


About Jimmy Hinton

HFF Jimmy HintonMr. Hinton serves as Managing Director of Research for HFF and is responsible for the firm’s research efforts. Mr. Hinton works with the executive management team to assist in investor relations and to inform both HFF staff and firm clients with in-depth analysis of economic, property and capital market trends. He is also responsible for providing extensive market reports, client presentations and deal-specific analysis for debt placement and investment sales assignments. Mr. Hinton’s responsibilities include substantial interaction with pension funds, life insurance companies, regional and CMBS lenders, REITs, foreign investors and private equity funds.

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