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The global economic disruption and uncertainty in capital markets caused by the COVID pandemic has done little to negatively impact the Real Assets sector; in fact, it has emerged as a haven for institutional investors seeking opportunities amid the turmoil.
A recent Investment Intentions 2021 survey from PREA, INREV and ANREV, which included 84 institutional investors and 15 Fund-of-Fund managers, highlighted that COVID has not decreased but increased investors’ appetite for real estate. Almost half (46%) of the institutional investors surveyed expect their real allocations to increase over the next two years - with Sydney, Melbourne and Tokyo as preferred investment locations - while only 7% expect it to decrease.
In addition, Preqin expects global AUM growth in alternative assets to average 9.8% per year from $10.7tn in 2020 to $17tn in 2025, despite a turbulent 2020 and start to 2021.
It is clear that the current, persistently low interest rate environment in the Asia-Pacific region in particular is attracting investors to alternative assets with the promise of outperformance, diversification and lower correlation with public markets. It is also clear that managers will need to scale their administration function to cope with this influx of assets. However, what considerations do Asia-Pacific managers need to take on board – such as the potential reputational impact of sourcing jobs overseas in a high unemployment environment – when scaling up their administration?
Download the Report Read MoreMarket adjustment slows
Although the market continues to correct, we note signs that the rate of adjustment is slowing.
• For the central fi ve wards (C5W), COVID-19 is still taking a toll on the market and casting a shadow over the market’s future, although the impact appears to be showing signs of alleviation. • Average Grade A offi ce market rents in the C5W fell 1.9% quarter-on-quarter (QoQ) and 5.3% year-on-year (YoY), and now stand at JPY35,762 per tsubo1 per month.
• The average Grade A offi ce vacancy rate in the C5W increased slightly by 0.2 percentage points (ppts) QoQ to 1.2% in Q1/2021.
• Average large-scale Grade B offi ce rents declined to JPY27,275 per tsubo per month – a contraction of 2.1% QoQ and 4.5% YoY.
• The average vacancy rate in the Grade B market lies at 2.2% following a loosening of 0.6ppts QoQ and 2.0ppts YoY.
• With limited supply expected this year and the next, the market should have time to adjust and recover, although secondary vacancy derived from the large supply in 2020 is a concern.
• While prime real estate is expected to hold steady, rents in poorly located and older offi ces are likely to fall, resulting in an overall market deterioration.
Download the Report Read MoreRental declines moderate
Occupier demand started to rise in Q1/2021, but the reintroduction of crowd density controls now suggests a more protracted recovery.
• Food & beverage (F&B) revenue largely declined in Q1/2021 as operators continued to be aff ected by the COVID-19 pandemic control measures such as dine in capacity constraints and restrictions on large-scale events. However, retail sales (excluding motor vehicles) improved in the quarter, largely due to a lower base in the same period last year.
• With the positive net demand of 301,000 sq ft outweighing the net supply of 108,000 sq ft, the overall vacancy rate declined for a second consecutive quarter by 0.3 of a percentage point (ppt) to 8.5% in Q1/2021, the lowest since the onset of the COVID-19 pandemic here in Q2/2020.
• Despite the lack of tourists, the Orchard Area remains resilient with the vacancy rate remaining unchanged at 11.6%. On the other hand, the vacancy level in Suburban Areas declined for a third consecutive quarter by 0.8 of a ppt to 5.2%, its lowest level since Q1/2016. • Savills monthly prime rents in Orchard Area fell, albeit at a slower pace, by 3.0% quarter-on-quarter (QoQ) to S$22.80 psf, compared to the 7.8% decline registered in Q4/2020.
• The more vibrant suburban malls saw a smaller contraction in Savills monthly prime rents in Suburban Areas of 2.0% QoQ to S$24.00 psf.
• Despite the limited supply pipeline over the next few years, the uptick of COVID-19 community cases led the government to backtrack from Phase 3 of the pandemic control measures to reintroduce Phase 2 (Heightened Alert). While the government has provided some form of support to retailers, it is expected that business conditions will remain challenging and rents of malls in both Orchard and Suburban Areas are forecast to decline by 15% and 10% respectively in 2021.
Overview
After rising rapidly in the first quarter of the year, the reflation trade hit a pause amid an unexpected rise in new claims for unemployment benefits in the US. Renewed waves of Covid infection caseloads, particularly in Asia, also prompted a flight to safety with yields on 10-year Treasuries briefly hitting their lowest in over a month during April. The Fed, in a scheduled meeting at the end of the month, left rates unchanged. Despite a recovering economy, it reiterated that highly accommodative monetary policy will continue for the foreseeable future. Stock markets in the region reacted optimistically, with MSCI’s regional equity gauge back in positive territory after dipping in the previous month.
Listed Real Estate
While the GPR/APREA Listed Real Estate Composite remained in positive territory, gains were largely modest, stymied by declines in regional heavyweights – China and Japan. China stocks fell the most, as investors remained wary of regulatory pressures following data that showed sustained property price increases. New home prices in March rose at the fastest pace in seven months, with increases noted in more cities. A third state of emergency declared in Japan, in a gambit to counter infection cases three months ahead of the Olympics, hurt sentiment in the country.
REITs
Supported by positive performances in most markets, the GPR/APREA Composite REIT Index ended the month higher, sustaining a run from February. The region’s REITs outperformed equities for the second month in a row.
J-REITs led the region, maintaining a winning streak from November 2020, as increased institutional interest in Japan’s real estate assets drove performance. Starwood Capital tabled a proposal to acquire Invesco Office J-REIT, with an initial offer price that valued the REIT at a premium of over 10%. Anticipating subsequent improved offers, the stock was quickly bid up by investors. Additionally, the BoJ maintained a pledge to buy J-REITS at an annual pace of up to ¥180 billion. In Australia, positive sentiment supported by low-interest rates and expectations of an economic recovery, fueled gains.
Meanwhile, Pakistan’s markets regulator Securities and Exchange Commission of Pakistan, is working on easing REIT regulations, removing the need for a mandatory building completion certificate which many investors viewed as a hurdle. The South Asian country has not seen any REITs after its only listing debuted in 2015.
The region’s REIT universe continued to expand. S.F. Holding, China’s largest listed courier provider, plans to inject three logistics centres worth HK$6.1 billion into an offshore REIT to be listed in Hong Kong. A listing application for SF Real Estate Investment Trust was submitted to Hong Kong’s bourse operator in April. Mapletree Investments, a property developer and manager, is also exploring listing a student housing REIT in Singapore that could raise about S$1 billion.
Outlook
More than a year since the pandemic erupted, the region’s REITs have retraced its decline to surpass the pre-pandemic high recorded in January last year. However, they continue to lag Asia Pacific equities in returns.
Looking ahead, a flare-up of coronavirus pandemic in the region and sustained inflationary pressures continue to cloud the outlook for markets. Still, the post-pandemic economic recovery will likely gradually gather pace, which should be positive for the region’s REITs. Increased activities in the commercial real estate market, led by institutional investors suggesting continued interest in real estate assets under the current low-interest-rate environment, is expected to provide support to REITs’ valuations.
Download the Report Read MoreThe performance of Sydney and Japan hotels are expected to be driven by increasing domestic travel on the rollout of vaccinations, while international visitors won’t arrive in masses anytime soon.
In addition, Asia’s cruise industry has been recovering quickly as operators nimbly tap into pent-up travel demand, which could grow further with mass vaccinations in Asia and globally.
In the past quarter, hotel deals remained at historically low levels, as owners hold rather than sell assets at a discount, given support from banks and governments.
