While we are neutral on the property sector globally, we still see opportunities in select real estate.

Singapore last week unexpectedly doubled the tax that foreigners will have to pay on residential property purchases to 60% while the rate for such purchases via an entity or a trust was raised to 65%. There were also slight increases in stamp duties that citizens and permanent residents will have to pay for their second and subsequent homes.

The cooling measures, aimed at curbing hot money inflows into the domestic housing market, came just two months after the last round failed to temper home prices. Official data last Friday showed that private home prices in Singapore rose for a 12 th consecutive quarter to gain 3.3% y/y in the first quarter of 2023.

But with inflation among the top concerns for global investors in recent years, investing in “real assets” such as real estate is increasingly appealing for those looking to mitigate the impact of long-term inflation. We continue to see opportunities in select real estate.

We like Singapore REITs as the cooling measures are aimed at the residential sector.
The latest property cooling measures is the third round in 19 months and are largely aimed at the residential sector. Home prices in Singapore have continued to climb, in part due to the influx of foreign buyers, especially from China. We continue to see risks of more cooling measures if home prices continue to outpace economic fundamentals.

However, we do not expect these measures to impact Singapore REITs, which we continue to like. After underperforming the broader market in 2022, we think REITs are on the cusp of a turnaround, buoyed by tailwinds from the economic reopening. Office rents have climbed 8% from their COVID-19 lows, industrial rents have risen by 6%, while retail rents have stabilized after a multi-year decline. We think rising rents could serve as a hedge against inflation, while the absence of exposure to the residential segment will insulate REITs from macroprudential risks surrounding the property market.

We prefer high-quality Singapore REITs whose distributions are cushioned against rising borrowing costs, and remain cautious of those whose distributions are vulnerable to rising borrowing cost or declining asset values.

Swiss-listed real estate funds are currently very attractive in our view.

Swiss real estate funds have undergone a price correction of around 20% since the beginning of 2022, and their premiums of 20% are now below their historical average of 25%. The price correction in real estate funds contrasts with the trend seen in the transactions market, where price indexes are still up year-over-year.

In our view, from a valuation perspective, Swiss real estate funds are currently more attractive than direct investments in real estate. We also think Swiss real estate funds are more attractive compared to Swiss bonds, as they offer some protection against inflation as well as income growth.

Over the next few quarters, we think Swiss real estate funds are likely to benefit from the strong fundamentals in the residential property market. Persistent housing shortages in urban areas will likely result in rising rental income for funds. Rental incomes may also receive a boost from the potential increase in the reference interest rate which will enable landlords to increase rents, thus auguring well for fund distribution.

In addition, the combination of strong income growth and the expected stabilization in the interest rate environment could also benefit capital values.

We see long-term opportunities in direct space that favor core assets in defensive sector.

The US commercial real estate (CRE) market dominated headlines last week after Vornado Realty Trust (VNO), one of New York’s largest owners of office and retail assets, suspended its common dividend (but not preferred dividends) until the end of the year.

In our view, US CRE faces real challenges from rising rates, tighter capital access, a slowing transaction market, and a slowing economy. Therefore, we are neutral on the US REITs sector in the intermediate term, especially given the uncertainty in regional banks and financing markets.

But for investors with a time horizon of two years or more, we do believe a number of attractive opportunities are emerging, especially in sectors including industrial, residential rentals, self-storage, data centers, wireless towers, and grocery-anchored shopping centers.