APAC Real estate investing in the Year of the Rat

APAC real estate investors should tread with caution in the Year of the Rat and consider structural themes in Japan real estate.

05 Feb 2020

This article was published in the Sunday Times on 2 February 2020

What will the year bring for APAC real estate investors?

Asian markets are set to usher in the year of the Rat, marking the beginning of another 12-year zodiac cycle. The year of the Pig in 2019 saw global growth trudge to a multi-year low, as heightened uncertainties arising from trade and geopolitical tensions reversed the general growth momentum observed at the start of the year. To be fair, most Asia economies displayed tremendous resilience amidst the pressure, and many more had significant tools in their economic kits to enact supportive monetary and fiscal counter measures. Commercial property in Asia continued to appeal to investors, even as caution around pricing risks increased, juxtaposed against the backdrop of weakening global sentiments.
In 2008, the parallel year of the Rat marked a tumultuous period for global economics and financial markets. Real estate in Asia was not spared from the fallout, as occupier demand and capital values experienced significant stress. In 2008, the United States elected a new president, a moment which made history for many reasons. And in 2008, the world rallied behind China as the devastating Wenchuan earthquake rocked the Sichuan province.
What will the year of the Rat bring to real estate investors this time round? We do not venture any bold predictions or prescriptive guesses, but are happy to share some views on how participants in the real estate space should position themselves in the year ahead.

Intelligence, flexibility and focus

In the Chinese zodiac, the Rat is ranked first, but not without reason. Folklore has it that the ancient race to determine the zodiac sequencing saw the Rat jump into the Ox's ear, and took a ride towards the finishing line, where it then leaped and stole a lead on the other animals. Such is the intelligence, flexibility and focus displayed by the Rat. And in 2020, we believe that investors should similarly adopt a playbook based on the same tenets, albeit with an added focus on risk mitigation.

Tread with caution still

What underpins our cautious attitude? The final months of 2019 saw some form of resolution in the ongoing US-China trade dispute, with a initial deal already being agreed and ironed out. Will there be an immediate rebound in global economic sentiments? It appears unlikely that a V-shaped recovery will take place even with greater geopolitical clarity unless there is a full roll-back of tariffs, new and old. We remain in a risk-on mode, on the back of existing concerns over the maturing technology cycle, upcoming elections in the US, as well as the ongoing structural slowdown in the Chinese economy. The last point is particularly important, as the regionalization of the Asia economy has led to greater reliance on the Chinese economy, and thus indirectly affecting commercial real estate markets in Asia. With or without the trade tensions that flared up in 2019, these risk factors have never really abated.

Real estate investors should not not over-react

That said, as the adage goes, burn not your house to fright the mouse. An equivalent Chinese idiom is 掘室求鼠.We have to be aware of the downside macro risks in 2020, but there is no need for real estate investors to over-react. The intelligent, nimble and focused investor should look beyond immediate economic cycles and turn their attention towards sub-market and asset selection in key Asia markets.

Selective office markets still see occupier outperformance

In markets where near term supply conditions are still constrained, such as the office sectors in Singapore, Sydney, and Melbourne, occupier performance continues to run ahead of the economy, bolstering income returns in the next few years. As core pricing continues to stay elevated, the intelligent investor may wish to be flexible in sourcing for under-managed assets and focus on driving income reversion. In Australian markets, longer lease structures throw up opportunities for buyers of selective office assets to still benefit from reversionary upside, even if market rents are normalizing. Also, the nimble investor can also look towards regional markets such as Brisbane, which is now arguably more diversified and resilient than it was in the last downturn. In regional markets, the focus should be on acquiring high quality assets which still offers some pricing advantage over primary markets.

Focus on dominant and resilient retail

In the retail sector, there has been a general re-rating outside of Asia, and in most markets we have seen the impact of e-commerce reflected in lethargic retail performance. The intelligent investor should be able to cut through the noise and focus on retail asset attributes and markets that are dominant and resilient. The truth is, urban layouts in most Asian cities are supportive of retail and to some extent, we do not expect a total meltdown in the sector. The nimble investor should keep an eye open for retail assets that have seen some capital value adjustments but offer significant scope to buy and fix. There has to be a laser sharp focus on executing asset and tenant mix enhancement to drive footfall and spending.

Look towards structural themes in Japan real estate

We have seen the Japanese economy hobble along unspectacularly in the past year, but that should not detract from the relative appeal of metropolitan cities such as Tokyo and Osaka, for example, where we see the effects of centralization supporting the commercial real estate and multifamily sectors. Looking beyond nationwide demographic pressures, the intelligent investor will be able to identify structural themes that are constructive for investing, such as population growth on a regional basis. Core sectors face tremendous competition from the Japan REITs, and the nimble investor will look towards the value-add and develop-to-core strategies, where she will focus on boosting incremental intrinsic value, and look towards REITs as key exit channels.

Stay invested

In the year ahead, investors should continue to deploy into Asia markets but are well advised to stick close to investments that feature high quality assets, strong locational attributes, and for riskier strategies, well defined partnerships with established local players.

Shaowei Toh

Head of Research and Strategy – APAC

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