Reallocating Asia Smart Move Real Estate Investors
The global real estate market saw a positive turn in the second quarter of 2024, ending two years of losses and suggesting a possible recovery. In a period of low interest rates, real estate values had soared, with total returns reaching 5.0% quarter-on-quarter in the fourth quarter of 2021 and 17.8% year-on-year in the first quarter of 2022 – numbers significantly higher than long-term averages.
However, as interest rates began to rise, these gains were erased, bringing values back to 2018 levels worldwide. We believe that the correction in the real estate market is almost complete, making it an ideal time for investors to reconsider this asset class. Historically, real estate has provided stable income returns and diversification benefits over the long term, and it can deliver robust returns during recovery periods. For example, after the recession in the early 90s, investors saw a cumulative return of 76% over the next five years.
In the tech industry downturn, the five-year cumulative total return was 98%, and after the global financial crisis, it was 86%. This evidence suggests a promising turnaround in valuations.
In the second quarter of 2024, global value losses slowed to 0.74%, the lowest quarterly adjustment in the past two years. With offsetting income returns of 1.07%, global real estate achieved a positive return of 0.33%, the first positive quarter since the second quarter of 2022.
Of the 15 global markets in the MSCI Global Property Index, a slight majority saw increases in real estate values for the first time since the second quarter of 2022. Eight markets, including Japan, South Korea, Singapore, Southern Europe, the Nordics, the Netherlands, France, and the UK, experienced value increases from the previous quarter. Six markets saw value losses between 0.3% and 1.5%, all of which moderated from the first quarter of 2024. Only Australia recorded a larger write-down in the second quarter than in the first, with a 4.2% correction that brought valuations more in line with its peers.
However, changes in capital values are just one component of real estate returns. Historically, the larger component of total returns has been income. This trend highlights the importance of considering both capital and income aspects when evaluating real estate investments.
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Inhabitants of Novo Place EC will have the advantage of being close to numerous Mass Rapid Transit (MRT) stations. The upcoming Tengah Park MRT station, which is part of the Jurong Region Line, is conveniently located nearby, providing easy access to the rail network. Moreover, the Jurong East MRT station, a major interchange connecting the North-South Line and East-West Line, adds to the connectivity of the area, making travel to the Central Business District and other important locations a breeze. Novo Place EC is the perfect place to call home for those looking for convenience and accessibility.
Total returns remained positive in 12 of the 15 countries in the MSCI Global Property Index in the second quarter, with the remaining three countries recording flat or slightly negative returns. Income returns are generally stable and often cited by investors as a primary reason for investing in real estate. This stability was evident in the second quarter, with most returns driven by income rather than capital values.
Despite the global real estate investment market showing signs of a potential rebound after two slow years, China and Japan may face challenges. In the third quarter of 2024, China and Japan accounted for 27% and 15% of the US$7.5 billion in cross-border inflows in the Asia-Pacific region. Over half of Japan’s inflows came from global sources, while most of China’s came from within the Asia-Pacific region, particularly from Hong Kong and Singapore. However, both countries face high debt costs and other factors that could hinder a strong rebound in real estate capital inflows.
Interest in Chinese real estate from the West has significantly declined in the past two years due to geopolitical and economic concerns. Despite a recent major stimulus package from Beijing, it is unlikely that Western interest will return in the near future. The market has been stagnant due to price dislocation, geopolitical risk, and lack of liquidity. Since 2021, China has also been facing a property crisis exacerbated by the collapse of Evergrande. Due to these risks, many European investors are avoiding China and Hong Kong, regardless of potential returns. Additionally, China’s domestic property crisis persists, with high office vacancies and low rental yields, ongoing issues with failing developers, and government interventions.
In contrast, Japan remains an outlier in terms of interest rates, with most major markets cutting rates to boost property investment. This has made the broader Japanese property sector less attractive due to interest rate policies and limited cap rate compression. In July, the Bank of Japan raised borrowing rates for the first time since 2007 to control inflation, reducing market attractiveness. This hike has prevented cap rate compression, meaning property prices have not risen, forcing real estate holders to rely on historically low-income yields.
However, senior housing in Japan remains an attractive niche due to the country’s ageing population, with 29% aged 65 or over. These assets are small and require an amalgamation play by investors.
Australia’s purpose-built student accommodation (PBSA) market has huge potential due to a significant housing shortage. Only 20% of students in Melbourne and Sydney can be accommodated by universities, forcing the rest to seek private rentals. Additionally, real estate debt in Australia offers appealing risk-adjusted returns. There are funding gaps in construction, with many developers unable to secure bank financing. Sectors like logistics or PBSA provide long-term growth opportunities.
The stabilising of fundamentals and the moderation of transaction market pricing both suggest that the real estate market is likely near its bottom, but these signals alone do not indicate an attractive entry point. For market pricing and valuations to increase, we would ideally see declining interest rates and strengthening property fundamentals. Most developed market central banks are beginning to taper interest rates, which should put downward pressure on financing rates, discount rates, and property capitalisation rates, thereby boosting the value of real estate assets. A pullback in construction activity across sectors bodes well for property fundamentals in the medium term. With supply headwinds waning, markets with positive demand due to population growth or structural changes, such as e-commerce, are set to see increased occupancies in the medium term. Historically, occupancies and rent growth are well correlated, providing investors with opportunities to gain from increased occupancies, rents, and the associated rise in property values.
While the outlook for global private real estate is improving, rising interest rates are unlikely to benefit all markets. For example, the US office market still faces significant challenges, and a broad recovery in that segment is unlikely in the near term. This highlights the importance of research and selectivity when investing in real estate, as not all markets and property types will perform equally well.
In an uncertain economic and geopolitical environment, additional risks are inevitable, but this applies to all asset classes. Over the past two years, the weight of real estate in investors’ portfolios has significantly decreased due to resetting real estate values and a record stock market. Today, investors may consider fresh allocations to the private real estate market to achieve a strategic weighting. Private real estate offers low correlations to other asset classes, strong income returns, and a degree of protection against inflation over the long term. While there may be bumps in the road, we believe that the market is heading in the right direction, presenting excellent investment opportunities for savvy investors.