Asia Pacific Handles Global Political Turbulence with Ease, Shows Healthy Real Estate Fundamentals
HONG KONG (July 13, 2017) — Asia Pacific continues to be viewed favourably by international investors for its economic and political stability. According to LaSalle’s mid-year Investment Strategy Annual (“ISA”) 2017, Asia Pacific experienced minimal impact from turbulent political events in the first half of 2017, with its two largest countries China and Japan meeting growth expectations year-to-date. Increasingly, China is the dominant trading partner in the region, and is expected to underpin steady positive economic growth in major countries such as Australia, Japan and South Korea. Investors, however, should remain wary and watchful for any signs of capital market volatility.
Asia Pacific continues to be viewed favourably by international investors for its economic and political stability. According to LaSalle’s mid-year Investment Strategy Annual (“ISA”) 2017, Asia Pacific experienced minimal impact from turbulent political events in the first half of 2017, with its two largest countries China and Japan meeting growth expectations year-to-date.
Increasingly, China is the dominant trading partner in the region, and is expected to underpin steady positive economic growth in major countries such as Australia, Japan and South Korea. Investors, however, should remain wary and watchful for any signs of capital market volatility.
Elysia Tse, Head of Research and Strategy – Asia Pacific at LaSalle, commented: “The expansion of credit in Asia Pacific and the gradual withdrawal of monetary stimulus in the West are two trends to watch carefully - both have the potential to disrupt the steady improvement of the global economy. That said, we expect slow and gradual improvement in economic indicators to stay on track at the macro level. We remain confident that a hard landing in China is unlikely over the near term, despite the headline news on the country’s debt challenge.”
The stability of the banking system is a vital constituent of a healthy economy. Asia Pacific banks have had strong support from their governments as well as central banks, with comparatively stronger balance sheets and currency reserves than those in the West. As a result, we do not see significant credit shortages looming in the region. The various agendas of central banks in Asia Pacific are expected to lead to a divergence in the monetary policies from the U.S. Even if central banks in the region start to raise rates, they are unlikely to raise rates too high or too fast. As a result, the likelihood of the U.S. rate hikes leading to a significant yield expansion in Asia Pacific over the near term is low.
Real estate fundamentals across the region are generally healthy, and demand drivers continue to respond to structural changes in demographics, technology, urbanization, and environmental factors (DTU+E) across the globe. Across the region, the ISA shows that investor appetite remains strong for core products, leading to strong exit opportunities for value-add investors, but also a lack of attractive opportunities for core investors in the near term.
Said Tse, “The near-term outlook for Asia Pacific real estate remains steady, with no significant changes relative to LaSalle’s view outlined at the beginning of the year. Occupier markets are largely balanced with the exception of a few pockets of oversupply, such as in Singapore, resource-based markets in Australia, and several emerging cities in China.”
“One of LaSalle’s key themes for 2017 is the fiscal stimulus of major Asia Pacific governments through infrastructure investments or household subsidies. Our strategy continues to emphasize non-discretionary retail in Japan, China, Singapore and Hong Kong due to the sector’s defensiveness and support from fiscal stimulus. We also continue to favor modern warehouses, particularly in China and South Korea, riding on the rise of e-commerce and the institutionalization of the sector,” Tse added.
Real Estate Opportunities and Investment Strategies in Asia Pacific
China: The stability of the country’s economy and the impact of its credit growth remains one of the region’s greatest opportunities, but also the single greatest risk. Further capital controls announced recently indicate that the government continues to focus on capital market stability while maintaining target growth. It is important to note that capital expatriation is not prohibited. Nonetheless, offshore structures are preferable for investors with shorter investment periods. For investors with a longer-term investment horizon, maintaining flexibility on exit timing remains the key.
Australia: Non-resource driven markets registered record-high transaction prices, bringing about the fastest commercial real estate price run-up in Australia among major developed countries of the world. The strong capital markets in Australia, however, dampen attractive opportunities in the near term.
Japan: Japan’s growth projection has led to a slightly more positive near-term outlook on the office sector than six months ago. However, LaSalle remains cautious due to over high levels of supply putting downward pressure on grade-A Tokyo office rents. Rents of Grade-B offices in strong locations are projected to hold up better, supporting asset repositioning strategies with well-defined investment horizon and exit options.
South Korea: The new direction of the Moon administration is expected to improve the nation’s relationship with China and potentially benefit selected retailers and the hotel sector.
Singapore: Counter-cyclical opportunities are emerging in Singapore office and retail, but offshore investors are advised to adjust their return expectations down, due to strong domestic investor appetite. The speed of improvement in the Singapore residential sector has been surprising on the upside. However, recent adjustments to residential cooling measures have led to limited opportunities for institutional investments.
About LaSalle Investment Management
LaSalle Investment Management, Inc. (together with its global investment advisory affiliates, “LaSalle”) is one of the world’s leading real estate investment managers. LaSalle on a global basis manages approximately $60.5 billion as of Q3 2018 of private and public equity and private debt investments. LaSalle’s diverse client base includes public and private pension funds, insurance companies, governments, corporations, endowments and private individuals from across the globe. LaSalle sponsors a complete range of investment vehicles including separate accounts, open- and closed-end funds, public securities and entity-level investments. LaSalle Investment Management, Inc. is a wholly-owned, operationally independent subsidiary of Jones Lang LaSalle Incorporated (NYSE: JLL), one of the world’s largest real estate companies. For more information please visit www.lasalle.com.
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