Publications

- September 1, 2019: Vol. 11, Number 8

Flattening global growth and regional tensions weigh on returns

by Christopher Hartung

While the global property sector was down slightly in July (by 0.5 percent) on further signs of flattening global growth, Asia Pacific property stocks had a tougher month, down 3.1 percent, as the region was led lower by tensions in Hong Kong and moves by China’s politburo to limit the property sector’s role as a potential economic stimulus tool. Because of ever-lower interest rates driven by more dovish US Federal Reserve and European Central Bank actions, however, yield-oriented REITs have continued to fare better; Asia Pacific–based REITs posted a 1.0 percent return in July, slightly better than global REITs, at 0.5 percent. With July’s returns, Asia Pacific REITs have returned 17.6 percent for the year, which, while very strong, lags global REIT performance of 20.2 percent. Overall for the year through July, Asia Pacific property stocks (when including developers) are also lagging global property stocks, up 11.4 percent and 15.5 percent, respectively. By comparison, broader global equities (MSCI World Index) are up 13.4 percent for the year (with property stock returns based on S&P Global Intelligence data, with quoted country returns in local currency, and regional indices quoted in US dollars).

While China’s property stocks are up above the regional average year to date (up 13.9 percent), July’s performance was weak (down 4.1 percent), as the sector sold off on policy announcements coming out of the politburo meeting stating the government will not use the property markets as a short-term economic stimulus. This, combined with other monetary tightening measures, suggest lower forward sales volume, which weighed on stocks (based on the S&P China Property Index, in local currency). In Hong Kong, property stocks were also weak, down 5.2 percent in July. As the market generally tracks China, some weakness was to be expected, but the extended and increasingly more volatile protests are creating substantial disruption in the market. Through July, Hong Kong property stocks have returned 9.9 percent. In Singapore, property stocks were down marginally, at –0.1 percent, as the city-state sees ever-softer economic data and is negatively affected by a stronger US dollar. The lower overall interest-rate environment and the aforementioned difficulties in Hong Kong, however, are bolstering the higher-yielding S-REITs, which are still up 21.0 percent for the year.

Finally, in Japan, the market was the regional anomaly and posted positive returns during the month, up 2.7 percent. Property fundamentals are decent, and the market is benefiting from its safe haven status during broader market and regional turmoil. Japanese property companies are now up 11.4 percent for the year through July.

Looking at net asset valuations based on S&P Global Intelligence data, Asia Pacific and global property stocks continue to trade below underlying net asset value, although that gap has narrowed with the strong start to the year. Currently, Asia Pacific and global property stocks are trading at 9 percent and 10 percent discounts to NAV, respectively. Japan trades above NAV at a 13 percent premium. Singapore is also trading better than the global average, but still at a 6 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 36 percent and 49 percent, respectively.

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

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