GPR/APREA Index Report – March 2021

Overview

Global bond markets endured a harrowing start to 2021, ending one of the worst quarters for investors since the last quarter of 2016 as the benchmark yield on 10-year Treasuries rose by over 80 bps. Any pullback was short-lived as bond yields resumed their climb through March to hit their highest in over a year, before the pandemic struck. The surge in yields weighed on the region’s equity markets, as investors turn skittish on lofty valuations.

Tech stocks which have benefitted most as pandemic plays bore the brunt of the sell off, not least helped by a crackdown on anti-trust behavior by Chinese authorities in its own backyard. Financial stocks were also rattled by the collapse of investment fund Archegos Capital, leaving the sector exposed to losses in billions. This lifted the region’s property stocks above the broad equity benchmark.

Listed Real Estate

The GPR/APREA Listed Real Estate Composite returned 1.8% with Australian property counters leading the region, powered by its stapled trusts. The Australian economy had posted better-than-expected GDP growth in the last quarter of 2020, as restrictions eased, with sustained gains in residential prices. Japanese stocks also outperformed on the back of their largest developers, with the lifting of emergency measures a sentiment booster. Meanwhile, gains were capped in China, as investors anticipated policy support to be scaled back with signs that the recovery is further gaining ground.

Hot on the heels after the merger of its office and retail REITs, CapitaLand announced a corporate restructure to take private its development arm private and carve out its investment management arm as a pure-play fund-management and fee-income business. The separately listed entity, CapitaLand Investment Management, will rank as the biggest real estate investment manager in Asia in terms of AUM, and the third-biggest listed globally – behind Brookfield Asset Management and Blackstone.

REITs

Asia Pacific REITs climbed 1.9% in March with broad-based gains across the region’s major markets. In addition to the strong returns of Australia’s diversified and industrial trusts, J-REITs also delivered on the strength of their Residential REITs, which powered the sector to record the region’s highest return in March. With a lack of catalysts to fuel further gains, Retail and Hospitality lost momentum.

Meanwhile, the Philippines is on track to debut its third REIT in under a year, after developer Filinvest registered its offering with the country’s exchange authorities. Comprising mostly of BPO office assets in a business district it master-developed, the offering is expected to raise PHP14.9 billion, if the over allotment option is exercised.

With investment activity roaring back to life late last year, Singapore-listed REITs continued to maintain their momentum in the hunt for cross border assets. Total acquisitions made by the sector is on track to surpass last year’s, following US$2.5 billion deals struck in the first quarter. Notably, Mapletree Logistics Trust made its maiden foray into India, acquiring two warehouses in the city of Pune for approximately S$84.4m. Ascendas REIT was the biggest spender, investing over US$1.7 billion, including the REIT’s first data centre acquisitions in Europe.

Outlook

One year since the pandemic erupted, the region’s property stocks have bounced back strongly from their March lows. While the region’s REITs have notably outpaced the wider real estate index, registering close to 38% returns for investors, they continue to lag Asia Pacific equities.

The near-term outlook will remain volatile, as base effects amplify inflationary expectations.  Additionally, the recent surge in caseloads from new virus variants will no doubt contribute to uncertainty ahead. With the spectre of supply shortages and rising commodity prices signaling a sustained, albeit uneven and at times messy, economic recovery, investors will continue to grapple with the implications of higher bond yields as well as looming policy tightening.

Still, spreads offered by the region’s REITs remain decent, typically close to 200 bps and higher in some developed markets. As economic activity normalizes, the ongoing reflation trade can be consistent with a synchronous global recovery. REITs will undoubtedly benefit from this backdrop to further deliver on price gains. The return of inflationary pressures, if orderly, being the inevitable trade off.

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