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#Real Estate — 09.04.2018

ASIA REAL ESTATE 2018 - WHAT DOES THE FUTURE HOLD?

Pol Tansens

We believe that last year’s change in risk awareness was more ‘psychological’ than ‘economic’ (in the world’s commercial and housing markets)

“Investors seeking double-digit returns should aim to capture ‘value-added’ investment opportunities. A so-called ‘value-added’ investment approach is a higher-return real-estate strategy, which we favour in all regions (North America, Europe, Asia).”

POL ROBERT TANSENS

Head of Real Estate Investment Strategy

But this did not happen because monetary policy remained accommodative in many regions (especially in Europe, less in the US). Even amid challenging Brexit negotiations, the UK property markets coped pretty well with the uncertainty, ending on a positive note last year.

To Brexit, or not to Brexit, that was and is the question. In any case, investors from Hong Kong are not deterred. The London commercial property market benefited from Hong Kong-based investors who closed two of the largest-ever property deals in the UK (in March 2017).

In Hong Kong itself, it was business as usual. The pearl of the orient commanded the highest house prices in the world! Even though many market observers do not understand how and why prices can stay so high for so long, it is pretty obvious that Hong Kong is a classic case of limited supply and strong demand (in particular among investors from Mainland China).

In Asia, housing markets are fragmented, and expensive in absolute terms. As projected, the housing market in Shanghai continued to contract in 4Q17 due to limited supply and tighter lending conditions. Buyers have become more rational in recent months (a stark contrast to the frenzied buying spree in previous years).

Turning to the listed property markets, the combination of low long-term bond yields and the decrease in property capitalisation rates has made Real Estate Investment Trusts (REITs) very popular in recent years, irrespective of geography.

In particular Asia performed very well in 2017, with double-digit returns over 30% for Hong Kong and Singapore (source: European Public Real Association) . North America was a plausible exception, given the less accommodative monetary policy implemented by the Fed.

So what does the future hold? Commercial property returns may slow from last year’s attractive levels, although specific spots could still deliver very nice total returns. Having access to the ‘right’ real-estate spots will be of paramount importance (for example offices allowing flexibility, logistics markets).

Even though occupational markets are in good shape in many economically-mature markets, interest rates — set to rise modestly — may less underpin property returns. So property yields are at threat from rising risk-free rates.

Holding a portfolio of real-estate assets spread across segments and countries is relevant for income diversification rather than outperformance. Investors seeking double-digit returns should aim to capture ‘value-added’ investment opportunities.

A so-called ‘value-added’ investment approach is a higher-return real-estate strategy, which we favour in all regions (North America, Europe, Asia). In reality, this could be the only way to generate above-average property returns (at least 10 %).

However, the track record of value-added asset managers is considered to be positive.  More challenging investment conditions could create new (and more affordable) investment opportunities at several stages of the market cycle, as witnessed during the last credit crisis. Asset managers could adopt a more ‘contrarian’ stance from time to time.

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