March continued the positive performance for both Asia Pacific and global property stocks that began during December 2016, with the markets returning 2.2 percent and 0.5 percent, respectively. With the performance, the region’s property stocks returned 12.1 percent during first quarter 2017, driven primarily by strong developer returns. This performance is almost double that of global property stocks, which returned 6.4 percent in the first quarter. March’s decent return, and the good overall start to the year, is likely because of generally flat yields, even as there were additional signs of strengthening 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 indexes quoted in US dollars). Overall, the property sector returns compare favourably to global stock total returns of 1.1 percent in March and 6.4 percent year-to-date, as per the MSCI World Index.

On a country basis, Chinese property stock performance was muted, up 0.3 percent in March and now up 3.3 percent for the year through March (based on the Shanghai Property Composite Index, in local currency). Generally, the economic environment continues to show promising signs — including PPI jumps — with the government shifting toward more-reasonable growth expectations and monetary policy measures. The country’s credit surge and property price increases warrant a bit of caution, however. Property fundamentals are strong, with good increases in contracted sales relative to levels a year ago and a near-term residential land shortage. Hong Kong property stocks continue to set the bar for regional performance, as the market benefits from being pegged to the US dollar, its close linkage with mainland China, and a rebound in residential sales after plunging on the stamp duty increase this past November. Hong Kong property companies surged another 4.2 percent in March to end the first quarter with a 17.9 percent total return.

In Singapore, property stocks also performed well during March, up 3.2 percent. The month’s result continues the broad price gains among S-REITs and developers. The strength of Singapore’s property companies continues to be driven by regional-high yields among S-REITs, their link to the US dollar, and increasingly-positive investment market sentiment stemming from a potential recovery in the city-state’s office market.

Finally, Japanese property stocks remain regional outliers, once again posting lagging returns. For March, Japanese property stocks were down, at –3.7 percent, as the market anticipates a potential office rent growth slowdown in the face of looming new supply in 2018, and expectations the Bank of Japan is unlikely to provide additional catalysts to the market. Through March, Japanese property companies have returned –6.1 percent.

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 23 percent above NAV because of the continued support from government policies, though this premium has come down during the past year. Singapore is at a steeper discount — 9 percent — to the global and regional average, but 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 discounts of 46 percent and 42 percent, respectively.

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