Asian real estate decoupling from the West
While global uncertainty continues to cast a shadow over the real estate landscape, experts are highlighting the decoupling of Asian markets from their Western counterparts.
This separation is particularly interesting in the current climate, as investors seek to mitigate risk during a period of global economic uncertainty, according to Tim Jowett, head of research for Asia at Hines.
“In simple terms, real estate market cycles are driven by capital markets trends and occupier or rental trends,” Jowett told AsianInvestor.
Hines
Capital markets trends really refer to the yield an investor can earn on a real estate investment, which is typically a spread of the local cost of debt set in accordance with underlying economic conditions, he explained.
When interest rates are falling, or relatively low, investor sentiment towards real estate can be stronger. The divergence in interest rate environments across Asia is one of its key differentiators from the US and European markets.
"Asia’s interest rate markets tend to be divergent given individual economic performance – it is rare all economies in Asia are increasing or decreasing rates at the same time," said Jowett.
Currencies, which are also driven by interest rate differentials, can magnify these cycles.
This variance is clearly illustrated by the contrasting experiences of Japan and Australia in recent years.
“Over the last two years, interest rates in Japan have been very low. The cost of debt funding is low, producing positive yield spreads for real estate investors. Liquidity for Japanese real estate has remained high, and prices have continued to grow,” said Jowett.
“In Australia, base rates rose 425 bps in 18 months, making the cost of debt much more expensive. Liquidity fell very sharply for Australian real estate, and prices have been falling.”
SUPPLY AND DEMAND
Beyond interest rates, Jowett highlights the importance of local economic fundamentals and construction dynamics.
"Occupier or rental market trends are driven by more fundamental demand and supply trends: the strength of the local economy and business environment, and how easy or difficult it is to construct new buildings."
This combination of factors underpins the diversification benefits of Asian real estate, said Jowett.
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Given the diversity in demographics, economic conditions, interest rates, and construction markets across Asia’s key economies, it is typical that different real estate markets are in different cyclical positions at any given point in time, underlying strong diversification benefits," he said.
These diversification benefits have proven quite stable over the last decade, with different cycles in different Asia economies, and real estate return data from Hines suggests that these benefits are increasing.
“In other words, Asian economic performance, and therefore its real estate market performance, is becoming less correlated to the US and Europe – and the correlation between certain real estate markets in Asia is becoming lower,” said Jowett.
While trends in Asia have made the region become less economically linked to US and Europe, trends and trading relationships between individual countries will also become more varied and complex, he added.
DIFFERENT TIMELINES
The combination of divergent cycles and unique, localised market drivers across Asia Pacific creates a complex but potentially lucrative landscape for shrewd investors, according to Peter Hayes, global head of investment research at PGIM Real Estate.
PGIM
“Investment themes we are seeing in Asia are both tactical (near or short-term opportunities to capitalise on short-term cyclical drivers) and strategic (longer term opportunities linked to enduring income resilience and growth),” Hayes told AsianInvestor.
For investors looking at shorter-term plays, Hayes identifies two key tactical opportunities. The first is linked to the return of tourists, leading to upside in prime tourism-related retail and hotels. The second tactical opportunity is within the office sector.
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"Although there are risks to office demand as a result of hybrid working, these risks vary across the major markets. For example, they are lower in Seoul but higher in Australia. We are seeing best quality buildings in the CBDs recording rental growth, with Brisbane and Seoul both leading that charge. But this makes for a stock pickers market," said Hayes.
In terms of longer-term strategic opportunities, there are compelling cases to be made for the living sector and logistics, said Hayes.
“The living sector continues to look attractive if only due to the resilience it offers. The multifamily market has always been a greater diversifier of portfolio risks for that reason, but rental growth has [surprisingly been on] the upside, owing to affordability pressures and the shortage of housing that is not expected to go away over the next few years,” he said.
However, it is still a small market for institutional investors, with only Japan as the stand out market.
“As a pan-Asia strategy, that means higher required returns to compensate for what is a riskier play. Stock selection will be key, and Australia is an investment opportunity that is growing rapidly alongside Japan,” he said.
In terms of senior housing, the narrative of aging populations is well known, but as an operationally intensive sector with rising running costs, there are affordability pressures to be aware of.
“The opportunity will grow, but there is much to be said about targeting markets where high house prices help provide finance for users, or locations that are rich in amenities. This sector is clearly one to watch,” he said.
Logistics is also still popular, a global trend that is increasingly playing out differently around the world. Ecommerce penetration rates are lower in smaller cities than larger ones. Meanwhile, the impact of changing trade flows, alongside faster global trade growth, also varies across major cities.
“Picking your markets remains key. We know there are large pockets of supply in Greater Tokyo and Greater Seoul for instance, whilst there are shortages in Sydney and Melbourne,” said Hayes.