Asia Pacific offers opportunities of scale and growth for real estate investors, but there are complexities involving transparency and liquidity that investors need to analyse and understand. The region is home to around 60% of the world’s population as well as the largest and fastest-growing commercial real estate markets. Growth in the commercial sector has been driven by a dynamic economy, and that of China in particular, but it has also benefited from improving transparency and liquidity, with the industry becoming more professional and the asset class evolving to be more suitable for institutional investors.
While a number of the region’s emerging economies have introduced real estate investment trusts (REITs) or passed REIT legislation, the main developed markets – Australia, Hong Kong, Japan and Singapore – have taken the biggest steps to introduce functioning REIT regimes that bring practical benefits to investors. Although most investors in listed real estate focus on the larger, more liquid equity markets, increasingly, companies domiciled in those markets are investing across the region. Singaporean and Hong Kong companies, for example, invest heavily in China.
Exhibit 1: (Developed) Asia Pacific listed real estate markets, based on country of operation
Source: Global Property Research/Asia Pacific Real Estate Association (APREA), 31/12/2018
The structural drivers of demand are strong
A number of factors are driving demand from within the region and from international investors, with population growth and urbanisation among the most prominent ones. Asia’s population is forecast to grow at more than 100 000 people a day, according to the UN’s Population Projections 2017. This dwarfs Europe and North America and is expected to drive rapid urbanisation. Indeed, Tokyo is already the world’s largest city with 37 million inhabitants, defying Japan’s overall negative population growth. The UN predicts that around two-thirds of the world’s population will live in cities by the middle of the century, up from the current 50%, with nearly half the growth in Asia.
Exhibit 2: Daily population growth in urban areas
Source: Asian Public Real Estate Association, UN 2017
Next to urbanisation, Asia’s ageing population is an equally important and often overlooked feature driving real estate investment in the region. Trends in Asia suggest it will be home to more over 65-year-olds than the eurozone and North America combined (Source: Bloomberg 2017). This has been a factor behind the growth in real estate investment in Europe and North America, and Asia can be expected to follow suit. Attracted by steady income and yields, pension and retirement funds increasingly recognise the sector as a core asset class.
Demand for real estate has been strong across Asia in recent years and the quality and size of the investable commercial real estate sector is increasing fast as cities urbanise. In 2018, nearly USD 160 billion was invested across Asia, up by 7% on 2017, according to agents JLL. Demand is expected to rise as the quality improves further and the amount of money targeting Asian real estate increases.
Investing in Asian real estate via the public markets
The Asian REIT market is broad, but in our view the really liquid, transparent markets are to be found in the developed markets of Singapore, Hong Kong, Japan and Australia. These provide the largest companies operating in the best regulated and most accessible locations. Countries such as South Korea, the Philippines, Malaysia, Indonesia and Thailand also offer opportunities, but these markets are less liquid, less open to foreign investors or offer too few companies that can meet the standards that global investors have come to expect in terms of governance, management competence and portfolio strategy. A sample of the largest companies with their characteristics is listed below.
Exhibit 3: The largest listed real estate companies in the region (dividend yield, 3-year market return)
Source: FTSE EPRA Nareit, 28/2/2019. The above-mentioned securities are for illustrative purposes only, are not intended as solicitation of the purchase of such securities, and do not constitute any investment advice or recommendation. The value of your investments may fluctuate. Past performance is no guarantee of future returns.
The cyclical drivers of demand appear attractive
Valuations appear attractive even allowing for a rally in the first quarter of 2019. Investors in real estate are typically attracted to the spread between the dividend yield for a company and government bond yields. As the chart below shows, the spreads on offer from listed Asian real estate companies vary across the region, but nonetheless exceed the 10-year average.
Exhibit 4: Listed real estate dividend yield spread over 10-year bond yields
Source: Bloomberg, FTSE EPRA Nareit, 28/2/2019. Past performance is no guarantee of future returns.
As well as more attractive valuations, there are other cyclical factors that could attract investors in the short term. Growth has clearly been sluggish over the past six to 12 months as China’s economy has slowed and trade uncertainty has weighed on producer sentiment. But since the start of the year, moves by central banks globally to loosen monetary policy, led by the Chinese and European banks, alongside a more lenient stance by the US Federal Reserve, should prove supportive for investment.
Investing in the region is not without risks
Concerns include the impact of the Sino-US trade war as well as the slowdown in China. At a more structural level, individual investors or families dominate property companies in a number of countries, cutting companies’ investable size as a result. Consequently, the approach to governance and reporting can diverge from the standards followed in the US and most of Europe as other shareholders have less influence over company decision-making. This can lead to disappointing performance. The introduction of REIT legislation in China and India, where the first REIT is expected to be launched shortly, should, however, improve transparency as well as liquidity.
Shortcomings in transparency are illustrated in Jones Lang LaSalle’s (JLL) 2018 report. It ranks the most transparent markets according to criteria such as governance, legal system and openness of transactions. There is no Asian market in the top tier of transparent markets. However, JLL acknowledge that Asia Pacific has improved the most in transparency since 2016, helping the region to break records in commercial real estate investment volumes.
Attractions, but not without quirks
Clearly, the region’s attractions include its large and expanding real estate market and a growing, urbanising and ageing population. International investors have been looking for more exposure in this diverse and maturing region which accounts for a third of the world’s economic output as well as a substantial growth premium over the US and Europe. The opening-up of India and China through REIT regimes should add significant opportunities.
There are question marks about liquidity in parts of the region and there can on occasion be issues of transparency and standards of governance. But in the public markets, these are generally understood and documented. It must be said that it is unlikely that the issues will be resolved rapidly in the manner that Western investors, rightly or wrongly, believe they should. As Rudyard Kipling ruefully observed “Asia is not going to be civilised after the methods of the West. There is too much Asia and she is too old.”