Six Trends Shaping the Asia Pacific Real Estate Market
Thursday, January 12, 2023
At the recent Canadian Real Estate Forum in Toronto, Marc-Andrè Flageole, Managing Director and Head of Presima, Slate’s boutique asset manager focused on global real estate securities, participated in a fireside chat exploring some of the defining trends shaping the Asia Pacific real estate market. The discussion covered a range of topics and macro themes – we’ve distilled six key takeaways from Marc Andrè’s session below.
The logistics sector continues to enjoy earnings growth
Much like in Europe and North America, the industrial logistics sector has been among the top thematic bets for real estate investors in Asia Pacific over the last few years. Although asset valuations might see a downward adjustment, coming out of Covid, this sector continues to demonstrate strong fundamentals, especially in Asian markets where e-commerce penetration was lower pre-pandemic, as compared to North America and Europe. In markets like Japan, the relatively low supply of modern logistics facilities also plays a role in shaping the sector’s steady growth, as tenants are looking to upgrade their work processes.
Don’t count office out; remote work hasn’t taken deep root in Asia Pacific
Office fundamentals in Asia Pacific appear different than the rest of globe. While public and private office real estate valuations in North America and Europe have diverged significantly in 2022, property owners in Asia Pacific haven’t experienced the same phenomenon. Following Covid, remote work in Asia did not take off in the same way it has elsewhere around the globe; the working culture in many Asian markets seems to largely encourage going into the office. Living spaces also tend to be smaller on average, which means many workers may not be as comfortable working from home. Indeed, in markets such as Tokyo, Hong Kong, Shanghai or Singapore, most people seem to be working in the office full time.
Diverging interest rates and asset prices are creating opportunities
Broadly speaking, inflation and interest rate trends in Asia Pacific appear somewhat more benign than in North America and Europe. Within the region, every market is behaving differently. In Japan, for example, monetary policy has remained dovish. China is starting to gradually ease its monetary stance and stimulate its economy. Markets more correlated to U.S., such as Singapore and Australia have seen more significant increases in debt costs, and some repricing is taking place as a result. It’s difficult to pinpoint precisely where cap rates will move to, but there is likely to be more devaluation in these regions as a result, and that will create new opportunities.
Government policies can point the way
Government policies can be a valuable indicator of where to expect growth. For example, Chinese and Hong Kong policy is now supporting the housing sector to provide supply to the market and alleviate housing cost pressures. The Chinese government has also been largely in favor of developing e-commerce. In our view, these policies could further accelerate growth in logistics and multi-family real estate. On the private side, there still appears to be some opportunities to develop industrial logistics in prime Chinese markets at an estimated 7-8% yield on costs, which provides a good buffer for riding out the cycles. Multi-family sector demand also seems strong, with rental growth and development margins that are still quite positive. In our view, while industrial logistics and multi-family housing remain largely attractive sectors in Asia Pacific, construction and operating costs are nonetheless rising across the board and so investors may wish to avoid long-term fixed leases where revenues are capped.
Don’t over rely on the disconnect between public-private asset prices
Overall, public real estate securities across Asia Pacific are trading at a discount of about 25% to the value of private assets, according to our estimates. In Singapore it’s about 20%, Australia near 25% and Hong Kong approximate 40%. The discount is generally less pronounced in Japan where the cost of debt has been more stable. While there is a valuation arbitrage that investors can benefit from in our view, tapping into that strategy can prove more difficult in Asia Pacific. There are many structural, legal, and regulatory barriers to privatizing public REITs in markets such as Hong Kong, where families and local institutions own many of the assets. As a result, fewer REIT take-private transactions are expected in Asia Pacific compared to other parts of the world.
Chasing manufacturing to Southeast Asia…not so fast
While manufacturing is increasingly moving from China to Southeast Asia, Southeast Asia remains a very fragmented market comprised of smaller economies. All the countries of Southeast Asia together add up only to a fraction of China’s GDP, and many carry significant emerging market risks, such as currency, monetary policy, title issues, and other legal challenges. Pivoting to the region by leveraging existing partnerships is one way for asset owners to test the waters, but there are questions about whether this strategy is scalable over time.