Outlook for Asia-Pacific REITs: Japan, Australia promising

December 14, 2018 17:03
Sydney (left) saw office rental increases this year while Japan property is set to gain from Tokyo's hosting of the 2020 Olympics. Photo: AFP/Bloomberg

My team and I have recently published our firm’s Outlook for 2019.

Our top call is Australia and Japan. Australia’s rental upward cycle started in 2016, and this year we have continued to see rental increases in the office and logistics sectors in Sydney and Melbourne. For example, top rent in Australia is now about A$1,800 (US$1,292) per square meter per year, which roughly translates to HK$80 per square foot per month, with very little incentive period. This is a historical record for Sydney.

Japan’s situation is different. Its GDP, for example, is recording negative growth in recent quarters. Note that GDP growth is often deconstructed into population growth, capital return, and the “miscellaneous” total productivity factor.

Japan’s population is now shrinking by about 1 percent per year, and thus it would be increasingly hard to maintain a positive GDP growth number.

Watching GDP growth alone may not tell the full story of Japan. That the consumer price index, an indicator of inflation, stays positive for over two straight years suggests that Japan’s economy is still performing well.

Japan will be hosting the Tokyo Olympics in 2020 and the Osaka World Expo in 2025, and the Japanese government is investigating other growth drivers such as casino resorts. These would continue the development and refurbishment of Japan’s infrastructure. Japan has maintained a healthy level of tourist arrivals and retail sales growth, and we think that hotels and retail REITs are worth considering.

Nonetheless, for us in the Asia-Pacific real estate financial industry, 2018 has been unusual, as geopolitics became a dominating factor in market performance. The escalation of trade disputes between China and the United States since the second quarter of 2018 has affected both the capital markets and the real estate markets. MSCI Asia Pacific has been down 11 percent year-to-date and 17 percent from its peak in January.

Ultimately, tariffs and other trade disputes can weaken economic performance, which will weaken rental growth. That said, the situation is still developing and thus there is a level of uncertainty priced into the equities performance this year. Reaching a resolution, such as a signed agreement between the US and China, is perhaps as important as the contents of the resolution.

Investors should be prepared that geopolitical news will continue to dominate the markets in the foreseeable future. Uncertainty, furthermore, does not necessarily mean downward trends. As governments negotiate and see common grounds, news flow can be both positive and negative, creating price volatility in all asset classes.

This does not mean investors should stay away from the markets, but they should take a long-term view with the capital they choose to deploy. For example, given the investment timeline of real estate is long-term, lasting anywhere from five to ten years and beyond, the stock volatility the market has observed this year can induce more capital to be deployed to real estate equity and real estate debt.

Thus, on top of their near-term fundamentals discussed above, investors have also switched to Japan and Australia because these economies will have larger economies to absorb event risks. In addition, as global supply chains are redesigned, various Southeast Asian and South Asian countries may see more foreign investment to drive their growth, creating real estate investment opportunities.

The deterioration of the US-China relationship has also partially contributed to the slowdown in outbound real estate investment from China, reflecting by a 7 percent decline for year-to-date transaction volume in the Asia-Pacific region and a 23 percent decline in cross-border transactions volume within the region, according to CBRE.

This development, however, has generated opportunities for other investors. For example, we have noticed that Singaporean and Hong Kong investors have taken up the void and become major sources of foreign investment into Australia and the United Kingdom.

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Chief Investment Officer, Admiral Investment Ltd.