Taking a global approach to allocate to real estate can provide opportunities to achieve capital growth and stable income, and gives investors the chance to access attractive risk-adjusted returns while improving diversification.
Global positioning
Asia Pacific outside Japan is one of the most exciting areas for investors looking to take a global approach. Asia Pacific is expected to remain the highest growth region of the world, supporting real estate demand in the long term.
For example, despite China’s disappointing GDP growth in Q3 2012, its economic growth remains among the highest in the world and several monthly indicators suggest that an economic rebound is on the way.
This year Australia’s economic growth is expected to be supported by China’s rebound, and the country is still better positioned among mature economies. Hong Kong’s economy recovered in the third quarter last year after a contraction in Q2. More generally, rising intra-regional trade suggests Asia Pacific countries are becoming less dependent on exports to the US and Europe. Most central banks across the region are also keeping monetary policy loose, which supports economic prospects and real estate demand for the region.
In terms of the dynamics of the real estate sector, while investors in Asia Pacific property remain mindful of the threat posed by the euro zone crisis, rents and capital values in most markets and sectors remained stable or continued to rise in the third quarter. As at the end of Q3 2012, Asia Pacific was the only region where transaction volumes were back to the levels they were in 2006.
We believe that economic risks in Asia Pacific are lower than in the US and euro zone, while long-run fundamentals for real estate remain strong. In the near term, risk aversion is evident among investors, resulting in a continuing focus on income-producing assets in prime locations.
Outlook up down under
Australia and New Zealand appear to be the most attractive markets for such low-risk investors. Transaction volumes in New Zealand increased in 2012 and rents and capital values remained stable across most Australian markets and sectors. Logistic facilities in Asia Pacific outperformed other industrial space, as they continue to benefit from the rapid growth of online retailing and the region’s strong demographic growth.
Across the region, in fact, the retail sector has been a bright spot on the back of recovering consumer confidence, relatively strong spending power among emerging markets and accommodative interest rates. This has been particularly true in Hong Kong, due to strong tourist spending from mainland China.
Returns for most real estate markets in the region are expected to be lower in 2012 than 2011. But we expect returns to rise in 2013, thanks to stronger occupier demand and growing investor interest. With Asia Pacific real estate expected to remain highly competitive over the next four to five years in a global context, it provides a strong case as to why investors should consider diversifying their real estate allocations and looking at funds which provide exposure to the region.
