Due to a seemingly ever-expanding list of countries with better economic growth prospects, September extended the Asia Pacific property sector’s positive performance, with total returns of 1.3 percent. Impressively, three-quarters through 2017, the region has only suffered one month with negative returns, a nominal –0.3 percent return in June. With year-to-date returns through September of 30.0 percent as compared with global real estate returns of 19.0 percent, the Asia Pacific region remains the best-performing region within the global property sector. Generally, real estate companies continue to benefit from a strengthening global-growth environment, but with the rise in yields (the U.S. 10-year Treasury yield increased by 21 basis points in September), REITs had a tough September (down 1.8 percent in the region), as they are partial yield proxies (with returns based on SNL Financial data, with quoted country returns in local currency, and regional indices quoted in U.S. dollars). Overall, the property sector returns compare favorably to global stock total returns of 2.2 percent in September and 10.8 percent year-to-date, as per the MSCI World Index.
On a country basis, the Chinese economy is showing good strength and driving regional growth, with the recent manufacturing PMI gauge at its highest level in five years. All eyes, however, have been on any new policy mandates prior to the 19th National Congress of the Chinese Communist Party and, true to form, tightening measures on property sales were expanded into Tier 2 and Tier 3 cities in the second half of September. As such, real estate stocks fell in excess of 6 percent during the last 10 trading days of the month, ending September down 3.9 percent. This puts the sector at 4.6 percent total returns for the year through September (based on the Shanghai Property Composite Index, in local currency). Meanwhile, Hong Kong property stocks continue to move slightly higher, up another 2.8 percent during September and now up 49.9 percent year-to-date. The market is benefiting from healthy real estate fundamentals, and new government farmland conversion policies that should lead to higher net asset values for developer-owned land banks.
In Singapore, property stock performance was down slightly (by 1.0 percent) in September, as the market took a breather after very strong year-to-date returns of 23.4 percent. Overall, the market is benefiting from a stabilization in office rents and residential prices, as well as dividend yields that remain well in excess of 10-year government bonds.
Finally, Japanese property stocks were modestly positive in September, at 0.9 percent, as investors are perhaps beginning to appreciate the relatively cheaper valuation levels of Japanese developers. In addition, the Japanese economy is continuing to improve, with good PMI numbers and a surprise to the upside in the latest Tankan Survey. For the year through September, Japanese real estate company returns are down 5.9 percent, with the J-REITs down 8.8 percent. Due to the de-rating, Japan valuations have become more reasonable, both from a premium to net asset value and yield perspective.
Looking at net asset valuations based on SNL Financial data, even with the strong returns, property prices are increasing globally because of demand for assets and growing property-level cash flows. Asia Pacific and global property stocks, therefore, are still trading below underlying NAV, at an approximate –7 percent discount. Japan still trades at a regional-high premium of approximately 17 percent above NAV, but this premium has come down substantially and is near the narrowest premium in over five years. Singapore trades closer to the global average, at an approximate 4 percent discount. Meanwhile, because of the preponderance of developers over REITs (and in the case of China, essentially all developers) among listed companies, China and Hong Kong trade at the deepest discounts of 35 percent and 40 percent, respectively.
Christopher Hartung is director, portfolio manager, with Lazard Asset Management, based in San Francisco.
This excerpt is from an article in the November issue of Institutional Real Estate Asia Pacific. To continue reading this article, sign up for a free trial subscription, or subscribe now.
