Henderson: How will the US presidential election impact property equities?

Key takeaways:

• While uncertainty around the election may have delayed some property investment decisions, there has been no material impact on property values in most sectors

• A win for Hillary Clinton may be a positive for healthcare, but negative for prison real estate investment trusts (REITs) and there may be incremental negative effects for the office sector

• A win for Donald Trump could be a positive for the asset class given his real estate background and business interests, but a negative for Mexican, Canadian and industrial property sectors

• The Henderson Property Equities Team’s holdings are well positioned for a victory by either candidate; the main driver of the team’s outlook continues to be an assessment of the broader market forces of supply and demand

Q: What are the key policy differences between the two candidates? 

Hillary Clinton continues to lead in the polls but Donald Trump has remained closer than predicted at this point in the election. If we learned anything from ‘Brexit’, it is to not underestimate the populace’s demand for change. Perhaps the largest difference between Clinton and Trump is each candidate’s position on international trade. Trump has emphasised a heavily protectionist message throughout his campaign and stated that he will end the North American Free Trade Agreement (NAFTA) and other trade treaties, impose tariffs on Mexican and Chinese imports, and build a wall along the US Mexican border to stem illegal immigration. Clinton’s views on international trade are thought to be closer to the status quo, but also slightly more protectionist than the current regime as she has recently backed away from support of the Trans-Pacific Partnership (TPP) trade agreement backed by President Obama. Another significant difference is around tax policy. Trump would cut taxes across the board including for high income individuals and businesses, while Clinton would propose raising taxes on wealthy individuals and certain businesses.

Q: What are the possible implications for the Federal Reserve in the upcoming election?

At first glance it appears Donald Trump’s harsh criticism of the Fed’s low interest rate policies could mean a change in approach if he were elected. It is important to remember, however, that the Fed is designed to be relatively independent. While a replacement of Obama-appointed Fed Chair Janet Yellen is likely in 2018, it is unlikely that Trump, whose wealth is mostly tied to real estate, would have any interest in seeing rates move faster than currently planned. A Clinton victory may lead to calmer markets that are more receptive to gradual rate increases.

Q: What will the impact be on the federal budget?

Both candidates are likely to propose ending the budget cuts designed to reduce the US budget deficit (the Sequester). Republican priorities for doing so include increasing defence spending (severely limited in recent years), while the Democrats are pushing for increased infrastructure spending. While the reasons for lifting the Sequester may be different, the end result is likely to be the same. Property markets should benefit incrementally due to a small boost to GDP. Meanwhile, the Washington DC office and residential markets are likely to benefit from increased demand. 

Q: How is uncertainty in the run up to the US election affecting property markets?

In the direct property market we have seen some signs of softness in property sales with fewer bidders for assets. However, we have not yet seen any material impact on asset values in most property sectors.

In terms of property fundamentals, some businesses may be delaying investment decisions until after the election. This could explain weakness in the hotel and office markets. We expect to see some positive momentum in hotel and office assets in Washington DC after the election as a change in administration is typically a positive for those property sectors.

Within the listed property market, North America has seen strong performance in 2016 despite uncertainty around the election. That said, Donald Trump’s policies around Mexico and foreign trade have increased volatility in the Mexican peso. He has said he would axe the TPP, and renegotiate NAFTA, which would have an adverse effect on industrial as well as Canadian and Mexican real estate stocks (the US is the largest trading partner for both countries).

Q: What key risks and opportunities would either candidate pose to US property equities?

The election of either candidate would likely bring incremental rather than material changes to property fundamentals and asset values. The Henderson Property Equities Team’s outlook on the asset class is unlikely to be significantly impacted by the election of either candidate; rather, our views will continue to be based on an assessment of the broader market forces of supply and demand.

Hillary Clinton is viewed as the status quo candidate, but she has some positions that could pose a risk to certain real estate sectors. Generally, she may be less business friendly in terms of taxes and regulations compared to President Obama. This may be a slight negative for the office sector. She has also called for an end to government use of private prisons which is a clear negative for prison REITs. On the other hand, she would look to continue broadening the reach of healthcare to more Americans, an incremental positive for healthcare real estate.

As for Donald Trump, he is likely to propose more business-friendly policies compared to Clinton with regards to taxation and regulation. His background in real estate along with significant interests in real estate investments could be a positive for the real estate sector. However, of concern to us are Trump’s views on international trade and any resultant negative impact on economic growth, especially in trade-sensitive sectors like industrials. Moreover, Trump has stated he would end ‘Obamacare’. While we do not expect this change to markedly affect the demand for healthcare services, the uncertainty it would create could be a negative for healthcare real estate tenants and by association the assets themselves. 

Q: How have you positioned your portfolios ahead of the election?

As mentioned, the presidential election result is not the primary driver of our investment decisions. We do not invest in private prison REITs for environmental, social, and governance (ESG) reasons. However, we have a position in a Mexican industrial REIT, which is likely to be negatively impacted by a Trump victory, but we believe the risk return profile of that investment remains attractive. In the US industrial sector, our only holding is Rexford, which we think will be more insulated from weakness in international trade than many of its peers. Finally, our holdings in the healthcare sector appear well positioned in terms of company-specific fundamentals and valuation for a victory by either candidate.