“Goldilocks” Global Economy Held Up In 1H 2018, Steady Real Estate Performance in Asia Pacific For 2H 2018-2019
SINGAPORE / HONG KONG (July 24, 2018) — The Goldilocks theme addressed in LaSalle Investment Management’s Investment Strategy Annual (ISA) 2018 held up remarkably well, even though odds of various recession triggers – geopolitical tension, monetary policy mistakes, or unsustainable fiscal spending – rose and fell in 1H 2018, according to its mid-year review. Against an eventful political backdrop, capital market volatility in Asia Pacific remained remarkably low, suggesting idiosyncratic risks are unlikely to build up to create systematic risks in the short term. Real estate continues to perform as a “shock absorber” for investment portfolios amidst volatility in the fixed income and equity markets.
Looking back over the last six months, the following trends in Asia Pacific played out as expected:
- The Chinese domestic economy stabilized despite the rise of trade tensions
- Most central banks in the region maintained an accommodative bias and were generally slower to raise interest rates than the West
- Regional economies continued to be supported by favorable government policies, particularly fiscal stimuli
- Asia Pacific real estate market fundamentals performed well
- Real estate capital flows in the region remained strong
A positive surprise was the outperformance against projection of several logistics markets in the region. New supply was leased up at a much faster pace than anticipated, while strong investor demand continued to drive cap rates lower.
Elysia Tse, Head of Asia Pacific Research and Strategy at LaSalle, said: “We expect real estate fundamentals to remain balanced in the rest of 2018 and 2019; beyond 2019, more uncertainties stand to unfold. We anticipate pockets of weaknesses if a growing real estate supply pipeline is coupled with downside risks from an all-out trade war, faster-than-anticipated rate hikes or geopolitical risks. It is still too early to tell how the US-China trade tensions will conclude, and the resulting impact on regional and global economies. Nevertheless, there is no question that the odds of a geopolitical “bear” event are escalating fast. In the short term, most central banks in the region are expected to gradually increase interest rates, but keep rates in a range that is still accommodative. Lending measures are tightening in several countries. As interest rates increase, borrowing costs are expected to edge up.”
“Since capital market-driven appreciation is mostly behind us, our key emphasis has been real estate occupier market fundamentals. Occupier markets in the region are currently at different stages of the cycle, which still offers a range of core, value-add and opportunistic opportunities. Back-to-basics remains a key theme for LaSalle’s portfolio managers as we focus on quality assets in developed and liquid markets, retaining stable income streams for core strategies, and asset management to create values for higher-return strategies.”
For the next six to twelve months, LaSalle maintains its relatively sanguine market view that the macroeconomic and real estate market outlook of the two largest economies in Asia Pacific (APAC), China and Japan, will continue to anchor a positive regional outlook in 2018 to 2019. In particular, China is set to prioritize the quality of growth over quantity and continue to focus on financial market reform. Investors can expect an environment of stable, long-term economic growth with occasional short-term volatility. In Japan, low unemployment rate, fiscal stimulus targeting lower-income households and the anticipated tax cuts for corporations that offer wage increases, are expected to yield a broad-based increase in retail sales and drive occupier demand for shopping centers.
Economic fundamentals are healthy in major APAC markets as unemployment rates in China, Hong Kong and Japan are currently at historical lows. There are more stimulative government policies on the fiscal front, designed to offset negative impact from trade protectionism, expected rate hikes, and any capital market volatility driven by geopolitical risk in most APAC markets, than in other regions over the next few years. As emerging Asian markets are likely more susceptible to the US dollar strength when interest rates increase in the US, LaSalle favors developed over emerging Asian markets.
Real Estate Opportunities and Investment Themes in Asia Pacific
Office: Broad-based corporate earnings growth in the region, global and local tech companies and co-working tenants have boosted office demand and reduced vacancy rates in major APAC real estate markets. While pricing and capital market demand remains strong, especially for quality office assets, major regional office markets are currently at different stages of the rental cycle. New supply in markets such as Tokyo and Shanghai have been bolstered by strong office demand. For core strategies, LaSalle continues to favor Australia offices, particularly in Sydney and Melbourne. For higher return strategies, LaSalle favors Tokyo, Sydney and Melbourne Grade B offices through repositioning strategies, with a focus on short holding periods and well-defined exit strategies. Build-to-core or value-add-to-core strategies in decentralized areas of large and mature office markets (such as Hong Kong, Shanghai, Tokyo and Sydney) with good amenities and transport links could be attractive to investors looking for higher returns with flexible or long investment horizons.
Logistics: Demand drivers for logistics remain comparatively positive in most parts of the region against rising supply, which requires close monitoring at the local level to manage vacancy risk. Technology in particular is driving and changing occupier demand – and ultimately investor demand – for logistics. Market yields for logistics remain much higher than those of office properties in the same markets. The attractive development yield spreads are also supportive of build-to-core strategies. In particular, LaSalle favors development strategies in China, South Korea and Japan, where spreads between yields on cost and stabilized market yields are attractive.
Retail: The threat of e-commerce impact on retail malls varies by market and retail segment. For example, brick and mortar centers in Australia are expected to be more negatively impacted by e-commerce than those in Japan and China. LaSalle continues to favor non-discretionary retail malls with a high tenant mix in grocery, pharmacy, food and beverage, and services located in strong residential catchment areas due to the defensive position they offer. Whilst e-commerce will further contribute to the ongoing bifurcation between dominant, better-located and better-configured shopping centers versus inferior locations and outdated shopping centers, some retail markets in APAC, such as China, may see physical retail centers benefit from online retailers effectively leveraging their fast-growing distribution channels from online sales, to open brick-and-mortar stores. LaSalle’s top pick for core and value-add strategies in the region is necessity-anchored retail in Japan. Investors should also look for opportunities where brick-and-mortar stores offer experiential attractions that are difficult to reproduce online.
Residential: For-sale residential prices have had strong run-ups from their respective troughs in most of the APAC markets, with the exception of Singapore. Home prices in Hong Kong have tripled since the trough in December 2008, while home prices in Sydney doubled during the same period. Home prices in these residential markets could be at risk, particularly when coupled with interest rate increases but LaSalle does not expect substantial corrections over the near term. In China and Singapore, limited for-sale residential opportunities are expected for institutional investors. In Japan and South Korea, the changing lifestyles of young households is driving the regeneration of urban neighborhoods. LaSalle favors urban rental apartments with excellent access to workplaces and amenities in major cities, particularly in Japan for core investors.
Hotel: Across the region, the rise of intraregional tourism and growth of middle-income households are expected to drive demand for hotels in the long term. The key strategy focus for investors continues to be on location selection, managing supply risk, and exit timing. LaSalle remains positive on Japan and Australia, as these markets are expected to benefit the most over the next few years.
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 $59.5 billion as of Q2 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.
This information is based on the market analysis and expectations of LaSalle and should not be relied upon by the reader as research or investment advice regarding LaSalle funds or any issuer or security in particular. The information presented herein is for illustrative and educational purposes and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy in any jurisdiction where prohibited by law or where contrary to local law or regulation. Any such offer to invest, if made, will only be made by means of a private placement memorandum. Past performance is not indicative of future results.