How long-term structural drivers are boosting real estate in the Asia Pacific region

Concerns around inflation and higher interest rates are reverberating in economies globally, with real estate assets facing potential repricing. Asia Pacific markets are no exception, though inflation is relatively lower, due to low direct trade exposure to Russia and Ukraine^[1], supply chain proximity to China and a more measured reopening approach. As such, growth prospects in developed APAC economies are expected to remain intact, with general sentiment being less negative. The region’s growing middle class is a major driver, expected to contribute 50% of global GDP and 40% of the world’s consumption by 2040^[2].

Real GDP Growth (%)

Source: M&G Real Estate based on data from Bloomberg, as of October 2022

Urbanisation is driving the need for more real estate

Stepping back from the macroeconomic noise, we believe focusing on long-term structural drivers could help to identify sustainable opportunities to grow income over time.

The region is home to some of the world’s fastest-growing cities, with continued urbanisation driving the need for more housing, offices, shopping malls, and logistics facilities. In particular, Australia’s expanding younger population is facing a major housing shortage in cities such as Sydney and Melbourne, where home ownership remained relatively unaffordable^[3]. With a deep pool of accustomed renters, demand is therefore rising for professionally managed Build to Rent (BTR) housing.

Real estate requirements are evolving

High internet and smartphone penetration position Asia Pacific as a leader of economic digitalisation. With fast-growing e-commerce markets, real estate requirements are evolving. 

The rise of online shopping has resulted in a surge in demand for sustainable and efficient logistics facilities close to infrastructure or within populous catchment areas. However, modern logistics supply currently lags demand in developed markets^[4]. This is likely to support rental growth prospects in the medium term, despite current upwards pressure on yields.

Cities driven by innovation could outperform

The shift towards digital industries is also fuelling a growing number of technology companies in the region. High specification buildings in locations that offer the benefit of economies of agglomeration are in particular demand, amid an expanding requirement for prime office space owing to the relatively lower impact of hybrid working in Asia.

We believe cities located in transparent markets and driven by innovation, with the ability to attract talent such as Seoul, Tokyo, Yokohama, Singapore, and Sydney are likely to outperform. M&G’s acquisition of the Minato Mirai Centre in Yokohama, within a rapidly emerging research and development hub, aims to capture this trend. The 21-storey, prime asset holds a 5-star CASBEE rating, installed with automated solar light tracking and systems to reduce heat and carbon emissions.

M&G remains focused on income

M&G’s long-established, core Asia Property strategy continues to focus on high quality real estate with resilient income potential in the current inflationary and rising interest rate environment. Prime assets in key sectors and gateway markets, including Australia, Hong Kong, Japan, Singapore, and South Korea, form the bedrock of the portfolio, which has a Gross Asset Value of over $6 billion^[5].

The benefit of scale offers the ability to target buildings with high environmental standards and wellbeing features in key city locations, which often reflect larger ticket sized deals.  

Targeting higher risk-adjusted returns

Developing strong asset management capabilities and joint venture partnerships also allow M&G to target higher potential risk-adjusted returns through situational, rather than market-driven, opportunities, as part of a value-add strategy. A property may be under-managed and in need of capex, or an owner may require liquidity at a corporate level. Across the investment spectrum, a focus on strategic location and conservative deal structuring remain pivotal.

Future-proofing assets is key

Future-proofing assets is a key consideration, underpinned by rising occupier demand for sustainable buildings, increasing regulation, and the opportunity to make a positive social and environmental impact. Building improvements also have the potential to boost overall returns, since assets that are more efficient to operate can generate a higher revenue. Buildings with the highest ESG credentials, such as Heritage Lanes in Brisbane, which holds WELL platinum certification, jointly developed by M&G and Mirvac, can also benefit from lower tax obligations.     

M&G recognises the importance of being ahead of the curve on this front, with focus on ESG issues only ramping up. In this respect, M&G’s Asia Property strategy was identified as one of the best performers by sector and region in the global ESG benchmark GRESB 2022 real estate assessment^[6].

Attractive risk-adjusted return potential

A pricing correction combined with stronger growth potential could offer an attractive entry point for overseas capital, in our view – particularly given the current strength of the dollar. Diversity of potential returns can also provide investment benefits, with a negative correlation between sectors and cities.

Property markets may be facing a cyclical turning point, but long-term structural trends continue to underpin Asia Pacific real estate. As such, we believe prime, sustainable assets continue to offer attractive risk-adjusted return potential.

To find out more about M&G Asia Property strategy, contact M&G Investments at [email protected]

Disclaimer:

• The strategy is actively managed and has the ANREV ODCE Index as its benchmark
• Where market conditions make it hard to sell the strategy's investments at a fair price to meet investors’ sale requests, we may temporarily suspend dealing in the strategy's shares.
• Real estate values can be affected by a number of factors beyond the strategy’s control and may be subject to long term cyclical trends that can give rise to volatility in values.
• The strategy will invest in a diversified portfolio of core real estate in Asia Pacific and the Portfolio Manager will seek to add value through portfolio construction, stock selection and asset management in accordance with the Investment and Operating Criteria.
• Please note, investing in this strategy means acquiring units or shares in a strategy, and not in a given underlying asset such as a building or shares of a company, as these are only the underlying assets owned by the strategy.
• The decision to invest in this strategy should be based on all objectives and characteristics and not solely its non-financial objectives and characteristics.
• Changes in currency exchange rates will affect the value of your investment.
• Please note that this is not an exhaustive list, further information about the risks that apply when investing can be found in the prospectus.

For investment professionals only. The distribution of this document does not constitute an offer or solicitation. Past performance is not a guide to future performance. The value of investments can fall as well as rise. Any forecasts and projections herein represent assumptions and expectations in light of currently available information; actual performance may differ from such forecasts and projections. Any expected rate of return herein is not a guaranteed rate of return. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and you should ensure you understand the risk profile of the products or services you plan to purchase. Information given in this document has been obtained from, or based upon, sources believed by us to be reliable and accurate although M&G does not accept liability for the accuracy of the contents. M&G does not offer investment advice or make recommendations regarding investments. Opinions are subject to change without notice. Before subscribing investors should read the Prospectus and Key Investor Information Document, which includes a description of the investment risks relating to these funds. Map data: Google.

M&G Investments Japan Co., Ltd.
Investment Management Business Operator, Investment Advisory and Agency Business Operator, Type II Financial Instruments Business Operator
Director-General of the Kanto Local Finance Bureau (Kinsho) No. 2942
Membership to Associations: Japan Investment Advisers Association, Type II Financial Instruments Firms Association
This document is provided to you for the purpose of providing information with respect to investment management by M&G Investments Japan Co., Ltd (the “Company”)  and its offshore group affiliates, M&G Investment Management Limited, M&G Alternatives Investment Management Limited and M&G Real Estate Asia Pte. Ltd. (collectively, the "Offshore Group Affiliates"), and neither provided for the purpose of solicitation of any securities nor intended for such solicitation of any securities.
The Company is registered to engage in the Investment Advisory and Agency Business, the Investment Management Business, and the Type II Financial Instruments Business under the Financial Instruments and Exchange Act of Japan.  Pursuant to such registrations, the Company may: (1) provide agency and intermediary services for clients to enter into a discretionary investment management agreement or investment advisory agreement with any of the Offshore Group Affiliates; (2) directly enter into a discretionary investment management agreement with clients; or (3) solicit clients for investment into offshore collective investment scheme(s) managed by the Offshore Group Affiliate or its affiliated company.  Please refer to materials separately provided to you, such as the applicable contract and an explanatory pre-contract document, for specific risks and any fees relating to the discretionary investment management agreement and the investment into the offshore collective investment scheme(s).  The Company will not charge any fees to clients with respect to "(1) entering into the discretionary investment management agreement or the investment advisory agreement with any of the Offshore Affiliates" and "(3) soliciting clients to invest into offshore collective investment scheme(s) managed by the Offshore Group Affiliates or its affiliated company" above. 

This financial promotion is issued by M&G Investment Management Limited (unless stated otherwise), registered in England and Wales under number 936683, registered office 10 Fenchurch Avenue, London EC3M 5AG. M&G Investment Management Limited is authorised and regulated by the Financial Conduct Authority.  For the purposes of AIFMD, M&G Luxembourg S.A acts as Alternative Investment Fund Manager of any fund(s) cited in this document. The registered office of M&G Luxembourg S.A is 16, Boulevard Royal, L-2449, Luxembourg. M&G Real Estate Limited is registered in England and Wales under number 3852763 and is not authorised or regulated by the Financial Conduct Authority. M&G Real Estate Limited forms part of the M&G Group of companies.