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Opportunities in Asia Pacific real estate
Economic and market outlook
Harry Tan, Head of Research, Asia Pacific, Nuveen Real Estate
Uneven recovery creates opportunitiesAfter the synchronized slump, a return to growth will vary among economies and markets. The uneven pace of recovery across the region highlights the importance of diversification and resilience in a real estate portfolio.
Many estimates suggest it will take around two years for activity to return to 2019 levels. Most of the region’s economies are expected to shrink in 2020, and those that will not, notably China, are expected to post the slowest growth in almost four decades. Economies with weaker internal demand or greater dependence on external demand will struggle the most as retail, transport and hospitality bear the brunt of the downturn.
These weak economic conditions mean continued fiscal and monetary support. Already, massive fiscal stimulus has been pushed out by policymakers to the tune of around 20% of GDP for Japan, Hong Kong and Singapore. Interest rates have also been sharply reduced, which should help bolster financial conditions as we work through a difficult 12 to 18 months of recovery. While it will take time for real economic conditions to improve, we expect that as with previous crises, capital markets will move in advance of these.
Fewer distressed assets are coming to the market compared with the global financial crisis (GFC) because credit conditions are much better than in 2008. Having fallen by close to 50% so far this year, transaction volumes should pick up in the second half of the year. The quantities of capital waiting to be deployed should help pricing recover, especially in the worst affected sectors. In the near term, however, asset owners could be facing potential income shortfalls and refinancing issues. These sectors – hospitality and decentralised Grade-B offices – could offer opportunities for investors.
Questioning the long-term thesisThe pandemic has revealed flaws in global connectivity, urban and office densification. But we expect real estate will be able to adapt to these, and for the crisis to accentuate and accelerate the structural trends already present in the market.
This means investors should seek resilient locations and assets that can benefit from the long-term trends of technological advancement, the shift in economic influence from west to east and urbanisation. Our research has identified 17 such cities in Asia Pacific which offer investors opportunities to create a diverse and resilient portfolio.
Louise Kavanagh, Managing Director, Nuveen Real Estate, Asia Pacific
The logistics sectorThe logistics sector has structural tailwinds and strong fundamentals that will likely continue to bolster demand beyond current short-term headwinds.
Global supply chain disruption has been the most evident impact of the pandemic, with the contraction in China’s manufacturing sector causing supply shortages. As a result, activity at major gateway ports and airports is likely to decline in the short term, leading to falling utilisation rates and perhaps idle resources.
But the boost to e-commerce could be more permanent, especially in areas which had previously low online activity such as grocery shopping. This will increase demand for logistics space. We think this is positive for key markets such as Seoul and Tokyo where the supply of high-grade specification stock is limited and demand is driven by domestic consumers. The increase in e-commerce is also evident in some second-tier cities, rural areas and among the older population, where penetration rates have traditionally been lower. COVID is perhaps an accelerant for trends already in train across the sector prior to the pandemic; namely, increased online penetration rates, expansion of online grocery and omnichannel retailing.
Despite the near-term hit to economic conditions, the outbreak of the coronavirus will only serve to strengthen occupier demand for well-built, well-located and modern last-mile warehouse and distribution centres near key infrastructure and transportation hubs over the long term.
The living sectorThe multi-family sector offers low volatility with downside risk mitigation characteristics. Japan is the biggest multi-family market in the Asia Pacific region. Demand in key cities should continue to be supported by demographic trends of growth from inward migration together with shrinking household sizes. These characteristics reinforce the sector’s occupancy and income resiliency.
We have seen reasonably solid rental growth in most of Tokyo’s sub-markets for the first quarter. It is worth noting that even during the GFC, rents adjusted by only around 10% and occupancy demand remained stable in the years after the crisis. The sector’s income durability and supportive capital values continue to attract foreign and domestic institutional investors.
To benefit from these attributes, stock selection is key. We think it will pay to invest in the well-located, mass market, affordable rent range – properties that will appeal to tenants seeking an urban lifestyle.
The retail sectorThe risk premium applied to this sector at current pricing and fundamentals does not yet point to a broad market recovery. But some focused retail strategies – such as those underpinned by structural trends – are performing.
A good example is the discount luxury outlet mall concept in China, which is supported by urbanisation and the rise of the middle class. Assets that closed during the pandemic have seen footfall resume to last year’s numbers. This resumption in consumer demand is viewed as more than just ‘revenge spending’ or one-off purchases. It is perceived as an enduring sustainable trend in the current environment, given customer desire to shift leisure travel and shopping to local destinations.
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The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance is no guarantee of future results. Investing involves risk; principal loss is possible.
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A word on risk
Real estate investments are subject to various risks, including fluctuations in property values, higher expenses or lower income than expected, and potential environmental problems and liability. Please consider all risks carefully prior to investing in any particular strategy. A portfolio’s concentration in the real estate, agriculture or timber sectors makes it subject to greater risk and volatility than other portfolios that are more diversified and its value may be substantially affected by economic events. International investing involves risks, including risks related to foreign currency, limited liquidity particularly where the underlying asset comprises real estate, less government regulation in some jurisdictions, and the possibility of substantial volatility due to adverse political, economic or other developments.
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