Research - APRIL 6, 2017

Property stocks continue their recovery in February

by Christopher Hartung

February continued the resurgence of both Asia Pacific and global property stocks since December 2016, with the markets returning 4.2 percent and 3.6 percent, respectively. With the performance, the region’s property stocks have now returned 9.6 percent during January and February, while global property stocks have performed well, but have lagged the region, at a 5.9 percent total return. February’s strong return, and the overall start to the year, is likely because of generally flat yields, even as there were additional signs of better than expected economic stability across the globe, including the United Kingdom, continental Europe, and China (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 3.0 percent in February and 4.6 percent year-to-date, as per the MSCI World Index.

On a country basis, Chinese property stock performance accelerated from a relatively subdued January, up 2.2 percent in February and now up 3.0 percent for the year through February (based on the Shanghai Property Composite Index). Generally, the economic environment appears stable, with GDP growth in the mid-6 percent range, though the government did slightly reduce its 2017 growth target. While the growth is quite positive, China’s credit surge and property price increases warrant a bit of caution. Because of the strong residential transaction environment and a near-term residential land shortage, however, the country’s developers are already well ahead of sales expectations. Hong Kong property stocks continue to set the bar for regional performance, as the market benefits from being pegged to the U.S. dollar and to its close linkage with mainland China. Hong Kong property companies surged another 5.6 percent during February, after returning 7.2 percent in January to end the first two months of 2017 with a 13.2 percent total return.

Singapore property stocks also performed well during February, up 3.4 percent. The month’s result continues the broad price gains among S-REITs and developers, which is unlike 2016, in which S-REITs drove the performance. Singapore property companies continue to be driven by regional-high yield spreads over 10-year government bonds in excess of 400 basis points. While the performance is understandable given the yield spread and dollar linkage, further strength driven by property fundamentals is difficult, as retail rent growth is lackluster and structural reforms drive weaker overall economic growth.

Finally, Japanese property stocks remain regional outliers, once again posting lagging returns after a strong fourth quarter 2016. For February, Japanese property stocks were down modestly, at –0.6 percent, as the market began anticipating a potential office rent growth slowdown in the face of looming new supply in 2018, a resultant slowing in dividend growth, and a rise in the Japanese government bond 10-year yield, which causes property stocks to look less attractive relative to other yield instruments.

Looking at net asset valuations based on SNL Financial data, Asia Pacific property stocks — slightly above underlying NAV — trade generally in line with global property stocks, at a 1.0 percent premium. Japan still trades at a regional-high premium of approximately 16 percent above NAV because of the continued support from government policies. Singapore is at a steeper discount — 10 percent — to the global and regional average, but is supported by strong yields. 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 discount of 42 percent and 45 percent, respectively.

Christopher Hartung is director, portfolio manager, with Lazard Asset Management, based in San Francisco.

This article appears in the April issue of Institutional Real Estate Asia Pacific. For more information on this magazine or to sign up for a trial subscription, click here.

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