Market Outlook

October was a difficult month for Asian Real Estate (RE) securities and REITs. We mentioned in last month’s update that we expected volatility given the upcoming elections in both the US and Japan, along with recent economic data that had reduced expectations of more aggressive Fed interest rate cuts. Expectations of a Trump victory were clearly anticipated in equity, fixed income, currency, and crypto markets. The Asian RE universe fell by more than 7% in USD, with much of the weakness coming from exchange rates. Back in 2016, Asian RE Securities and REITs suffered after Trump’s surprise victory, initially falling by 6% in the weeks after the election and significantly trailing the SPX, which rose over that same period. However, the sector rallied by nearly 10% from the start of 2017 until mid-year when Trump officially took office and subsequently rose by 15.5% in 2017. Given the outcome was less of a surprise this time around, we believe the market had somewhat priced in a Trump victory already.

While the risks of accelerating inflation due to pro-cyclical policies are a concern, there are other forces that will help contain inflation, such as rising productivity; and while tariffs may spike US inflation initially, they are likely to hurt the economy and some US companies due to higher input costs and potential retaliation from trading partners. China is cautious in unleashing additional stimuli until Trump takes office, which has led to additional disappointment in the region. While it is hard to estimate the full potential impact on rates and Asian growth from Trump’s anticipated policies, the sector performance in October was worse than in the months after Trump’s 2016 surprise victory. Therefore, we are hopeful that we will see some bottoming soon given the sharp decline in stocks and forecasted recovery in DPUs going into 2025 and 2026.

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The real estate market in the Asia Pacific (APAC) region continues to exhibit robust growth at a global scale, including significant advancements in the housing segment and green transformation. Technological progress in APAC economies has also catalysed transformation within the real estate sector, with digitalisation and data centre development gaining momentum. These changes have concurrently influenced the development of real estate projects within the region.

Globally, the real estate sector is increasingly embracing environment, social and governance (ESG)-driven innovations such as acquiring green city ratings, investments in renewable energy projects, among others. This shift is evident in the updated real estate regulations within the APAC region for 1QFY25. Several APAC economies, including China, Hong Kong, Japan and India have implemented guidelines promoting green infrastructure and technology integration to augment their real estate markets. Furthermore, commercial and industrial real estate is significantly rising in the APAC region with development plans for business and commercial projects underway.

In line with these strategic developments, APAC economies offer an attractive prospect for investors due to regulatory updates aimed at attracting various asset classes and types. These economies are predicted to play a pivotal role in channelling regional investments and fostering development in the forthcoming months.

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Continued soft inflation and employment data in the US has changed market leadership as expectations for several Federal Reserve Fed Fund rate cuts has led to a strong rotation from large cap tech into lagging sectors including REITs which are seen as beneficiaries of lower rates. The FTSE EPRA Nareit Asia USD Dev Net TR rose 6.34% in July. Our active markets:

• Japan, +9.5%: BoJ Governor Ueda raised short term rates, with a following press conference that was both hawkish and confusing resulting in a lot of volatility until now. JREITs have performed much better relatively and are up in USD terms since the move. Bank stocks, beneficiaries of higher rates, moved up initially after Ueda’s comments but then lost nearly 25% in two days as rate expectations have changed with global macro conditions continuing to moderate.

• Australia, +3.8%:  The RBA announced no change to policy rate in its August 6 meeting and pushed back on expectations for a near-term OCR cut given persistently high inflation caused by high labour costs. We expect Goodman Group to show solid results including decent guidance due to strong contribution from its growing Data Center developments. We will probably increase our underweight should earnings be well received next week.

• Hong Kong, +1.5%: Expectations going into results are extremely low especially after Hang Lung Properties’ DPS cut by 1/3rd due to weak sales particularly in China. We attended Link REIT’s HK and Shenzhen asset tour and noticed weak attendance from buyside firms as interest in the market is at extremely low levels despite cheap valuations.

• Singapore, +6.2%:  SREIT results were in line with expectations and dividend growth has been stunted by higher interest costs. Given the outlook for rates globally, rates in Singapore will follow as the MAS does not set interest rate policy directly.

The bottom line: REITs have been trading up since the US CPI print on July 11 on the back of a reset in rates expectations and decent earnings.

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Continued soft inflation and employment data in the US has changed market leadership as expectations for several Federal Reserve Fed Fund rate cuts has led to a strong rotation from large cap tech into lagging sectors including REITs which are seen as beneficiaries of lower rates. The FTSE EPRA Nareit Asia USD Dev Net TR rose 6.34% in July. Our active markets:

• Japan, +9.5%: BoJ Governor Ueda raised short term rates, press conference was hawkish and confusing. Created a lot of volatility to this day. JREITs, have performed much better relatively and are up in USD terms since the move. Bank stocks, beneficiaries of higher rates moved up initially after Ueda’s comments, but then lost almost 25% in two days as rate expectations have changed with global macro conditions continuing to moderate
• Australia, +3.8%:  The RBA announced no change to policy rate in its August 6 meeting and pushed back on expectations for a near-term OCR cut given persistently high inflation caused by high labour costs. We expect Goodman Group to show solid results including decent guidance due to strong contribution from its growing Data Center developments. We will probably increase our underweight should earnings be well received next week
• Hong Kong, +1.5%: Expectations going into results are extremely low especially after Hang Lung Properties’ DPS cut by 1/3rd due to weak sales particularly in China. We attended Link REIT’s HK and Shenzhen asset tour (separate note) and noticed weak attendance from buyside firms as interest in the market is at extremely low levels despite cheap valuations
• Singapore, +6.2%:  SREIT results were in line with expectations and dividend growth has been stunted by higher interest costs. Given the outlook for rates globally, rates in Singapore will follow as the MAS does not set interest rate policy directly.

Bottom line: REITs have been trading up since the US CPI print on July 11 on the back of a reset in rates expectations and decent earnings.

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