The Asia Pacific listed real estate market is currently trading at wide discounts to both the broader market and its unlisted property cousins.
We will discuss why we think that this part of the real asset market is set to shine again. We also discuss how blending select REITs with Infrastructure and Utilities in our Asia Pacific Urban Trends Income strategy may offer attractive income focused returns, with lower risk than equities or sector specific strategies.
To us, certain parts of Asia Pacific listed real estate look attractively priced across a range of metrics. Price to book, historic and forward yields, implied cap rates - these are lower than the equity broader market, but also better value to where they were pre-Covid.
We see no reason why the prices of many REITs can’t get back to where they traded previously.
Reopening and inflation continues to bolster rental drivers
Covid re-opening is now benefiting different countries, especially those in Asia that have been slower to re-open such as China and Hong Kong as well as regional destinations for Chinese students and tourists, particularly Australia and New Zealand. On the other hand, this tailwind is no longer blowing for Europe and the Americas as they have already largely returned to normal.
We see the combination of re-opening and inflation as a real positive for Asia Pacific property rents, especially for Retail properties. For Retail REITs there is a strong flow on effect from a recovery in foot traffic, the return of in-bound tourists and growing tenant sales – with improving tenant sales enabling landlords to charge higher rents. Furthermore, some REITs have rents explicitly linked to inflation such that they are benefiting from current high inflation prints (e.g., Scentre Group in Australia).
Cheaper than unlisted despite better liquidity and quality
Relative to the unlisted market, we have been seeing weaker returns for the listed property markets. Listed markets are quick to price market information, namely higher rates, slowing demand etc, whereas private markets are subject to periodic, generally once a year valuations. As a result, listed property has been trading at a notable discount to book values, when compared to unlisted equivalents.
However, the news last year on the freeze in redemptions in the United States for the Blackstone Real Estate Income Trust (BREIT) and Starwood Real Estate Income Trust (SREIT) has ‘pulled the curtain’ on the potential undesirable consequences of too great a reliance on unlisted assets.
Given this opportunity, we expect more outflows from unlisted property funds into listed to take advantage of this valuation discrepancy.
The Asia Pacific listed real estate market is currently trading at wide discounts to both the broader market and its unlisted property cousins.
We will discuss why we think that this part of the real asset market is set to shine again. We also discuss how blending select REITs with Infrastructure and Utilities in our Asia Pacific Urban Trends Income strategy may offer attractive income focused returns, with lower risk than equities or sector specific strategies.
To us, certain parts of Asia Pacific listed real estate look attractively priced across a range of metrics. Price to book, historic and forward yields, implied cap rates - these are lower than the equity broader market, but also better value to where they were pre-Covid.
We see no reason why the prices of many REITs can’t get back to where they traded previously.
Reopening and inflation continues to bolster rental drivers
Covid re-opening is now benefiting different countries, especially those in Asia that have been slower to re-open such as China and Hong Kong as well as regional destinations for Chinese students and tourists, particularly Australia and New Zealand. On the other hand, this tailwind is no longer blowing for Europe and the Americas as they have already largely returned to normal.
We see the combination of re-opening and inflation as a real positive for Asia Pacific property rents, especially for Retail properties. For Retail REITs there is a strong flow on effect from a recovery in foot traffic, the return of in-bound tourists and growing tenant sales – with improving tenant sales enabling landlords to charge higher rents. Furthermore, some REITs have rents explicitly linked to inflation such that they are benefiting from current high inflation prints (e.g., Scentre Group in Australia).
Cheaper than unlisted despite better liquidity and quality
Relative to the unlisted market, we have been seeing weaker returns for the listed property markets. Listed markets are quick to price market information, namely higher rates, slowing demand etc, whereas private markets are subject to periodic, generally once a year valuations. As a result, listed property has been trading at a notable discount to book values, when compared to unlisted equivalents.
However, the news last year on the freeze in redemptions in the United States for the Blackstone Real Estate Income Trust (BREIT) and Starwood Real Estate Income Trust (SREIT) has ‘pulled the curtain’ on the potential undesirable consequences of too great a reliance on unlisted assets. We discussed this in more detail in 'It's freezing out there, but we are not talking about the weather...'.
Given this opportunity, we expect more outflows from unlisted property funds into listed to take advantage of this valuation discrepancy.
We see the combination of reopening and inflation as a real positive for Asian Pacific property rents, especially for Retail properties.
Opportunities by being selective
We are being more cautious on the Office REIT market in some developed markets, given the challenges and headwinds from working from home trends, weakening economies, and higher supply in markets (such as Hong Kong).
This is why we think it is important to be selective. We see solid fundamentals in some markets like India and Singapore. For example, India has seen some of the strongest absorption levels globally over the last decade, with strong demand coming from a growing outsourcing and services economy with many large multi-nationals locating key middle and back-office operations in the country given the attractive pool of talent and relative cost advantage. Indian REITs that tap into this theme include Embassy Office Parks REIT.
This dispersion of opportunities within REITs highlights the importance of blending Real Asset sectors and being selective through proprietary research.
Focusing on everyday use assets and demographic trends
We do agree that the Asian property market has seen some unique issues in the past year, particularly within Chinese Property Developers, however this is a segment that we do not invest in given our process excludes developers.
While there may be lingering debt restructuring concerns for some Property Developers, we are somewhat ambivalent. For REITs, we only focus on lower risk “rent collectors” that service the everyday needs of urban populations. These include high quality REITs such as Link REIT and Fortune REIT in Hong Kong, CapitaLand Integrated Commercial Trust in Singapore and Charter Hall Retail REIT in Australia.
We also only invest in very liquid and transparent listed REITs, and diversify with listed infrastructure and utilities names. We do not invest in the higher risk property developers that are more subject to fluctuating property prices, the need to replenish land banks, unknown volumes, build risk etc.
In addition, a key part of how we invest is to focus on property companies that have exposure to regions with positive urbanisation trends, of which the Asia Pacific ex Japan region continues to look very attractive. We see that this urban population growth thematic is a key driver of demand growth for all Real Assets across the Asia Pacific region, which should help to drive the long-term income and capital growth of the Asia Pacific Urban Trends Income portfolio.
The advantages of blending listed REITs with Infrastructure and Utilities
Our Real Asset strategies invest in a unique blend of listed Infrastructure, REITs and Utilities. By combining these three listed asset classes together, we can access ongoing structural demand from urbanisation while reducing exposure to the less attractive components of each asset class – such as low-yield airports, higher risk office/commercial properties or ESG-challenged utilities.
By eliminating the least attractive parts of listed Infrastructure, REITs and Utilities, we aim to provide investors with a portfolio that has a higher yield and lower risk than sector specific strategies, and a lower correlation with other asset classes. We also can strategically move between the three sub sectors when we see opportunities to increase returns.
All in, given the attractive valuations, re-opening, and ongoing structural demand from urbanisation, we remain very positive on including select listed REITs from the Asia Pacific region in our Asia Pacific Urban Trends Income portfolios.
Click here to find out more about the Martin Currie Asia Pacific Urban Trends Income (APUTI) strategy, and also our Martin Currie Australia Real Income strategy and Martin Currie Global Urban Population Megatrend (GUPM) strategy.
Important information
This information is issued and approved by Martin Currie Investment Management Limited (‘MCIM’), authorised and regulated by the Financial Conduct Authority. It does not constitute investment advice. Market and currency movements may cause the capital value of shares, and the income from them, to fall as well as rise and you may get back less than you invested.
The information contained in this document has been compiled with considerable care to ensure its accuracy. However, no representation or warranty, express or implied, is made to its accuracy or completeness. Martin Currie has procured any research or analysis contained in this document for its own use. It is provided to you only incidentally and any opinions expressed are subject to change without notice.
The document does not form the basis of, nor should it be relied upon in connection with, any subsequent contract or agreement. It does not constitute, and may not be used for the purpose of, an offer or invitation to subscribe for or otherwise acquire shares in any of the products mentioned.
Past performance is not a guide to future returns.
The views expressed are opinions of the portfolio managers as of the date of this document and are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. These opinions are not intended to be a forecast of future events, research, a guarantee of future results or investment advice.
Some of the information provided in this document has been compiled using data from a representative account. This account has been chosen on the basis it is an existing account managed by Martin Currie, within the strategy referred to in this document. Representative accounts for each strategy have been chosen on the basis that they are the longest running account for the strategy. This data has been provided as an illustration only, the figures should not be relied upon as an indication of future performance. The data provided for this account may be different to other accounts following the same strategy. The information should not be considered as comprehensive and additional information and disclosure should be sought.
The information provided should not be considered a recommendation to purchase or sell any particular strategy/ fund/security. It should not be assumed that any of the security transactions discussed here were or will prove to be profitable. It is not known whether the stocks mentioned will feature in any future portfolio managed by Martin Currie. Any stock examples will represent a small part of a portfolio and are used purely to demonstrate our investment style.
Risk warnings - Investors should also be aware of the following risk factors which may be applicable to the strategy shown in this document.
- Investing in foreign markets introduces a risk where adverse movements in currency exchange rates could result in a decrease in the value of your investment.
- Emerging markets or less developed countries may face more political, economic or structural challenges than developed countries. Accordingly, investment in emerging markets is generally characterised by higher levels of risk than investment in fully developed markets.
- This strategy may hold a limited number of investments. If one of these investments falls in value this can have a greater impact on the strategy’s value than if it held a larger number of investments.
- Smaller companies may be riskier and their shares may be less liquid than larger companies, meaning that their share price may be more volatile.
- Income strategy charges are deducted from capital. Because of this, the level of income may be higher but the growth potential of the capital value of the investment may be reduced.
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