M&G on the Outlook for Asia Pacific Real Estate

Erle Spratt Fund Manager M&G Real Estate

An overview of the current Asian property markets for finews.asia from Erle Spratt, Fund Manager of M&G Asia Property Strategy, M&G Real Estate

Erle Spratt leads the fund management team for the M&G Asia Property Fund.

Leasing market conditions are generally favourable as vacancy rates continue to decline or remain stable in most markets across the region. In the short term, the strongest rental growth prospects are to be found in Australia and Japan office sector, particularly in Tokyo, Sydney and Melbourne.

Improving leasing conditions are also seen in Hong Kong office and Australian retail markets. In Australia, rental growth prospects in Sydney and Melbourne office are backed by the recovery in the business services and technology, media and telecom (TMT) sectors.

In contrast, the leasing environment remains challenging in the mining-dependent markets, such as Perth and Brisbane. We expect that such divergence of conditions within the Australian office market will persist over the next 12 months. However, with limited supply, recovery should begin to be more broad-based over the medium term.

Hong Kong Retail Weak

Rental growth prospects are also brightening in Hong Kong office, where the central office market is starting to show signs of recovery after more than two years of stagnant rents. Faced with moderating demand at home, Chinese companies are expanding into Hong Kong, thus underpinning the stronger take up of central prime space.

However, the decline of tourist arrivals from China continues to negatively impact the prime retail market. Retail rents are expected to fall further over the next 12 months.

Singapore and Seoul office market fundamentals are expected to remain weak as vacancy rates continue to rise against softening demand and rising supply in the short term. Nevertheless, the regional market fundamentals are expected to benefit from improving economic growth and the gradual shift from exports to domestic consumption across major Asian economies. In addition, the increasing maturity and integration of the region will support activity and capital flows within Asia, strengthening the demand for high quality and efficient real estate space across all major sectors.

Sustainable Income

We expect that cross border investment in Asia will increase further over the next 12 months. Foreign investors are attracted by the increased maturity and liquidity of Asian real estate, as well as the diversification benefits and the breadth of the opportunities on offer.

Investors are expected to continue to focus on quality and sustainable income assets as returns are increasingly driven by income growth as the capital market cycle appears to be approaching its peak.

Economic Review

The Asia Pacific economic outlook remains broadly stable despite the rising volatility in the equity markets in early 2016. GDP growth across developed markets in the region is expected to improve slightly over the next 12 months, supported by domestic consumption, strengthening labour markets and lower energy prices. Continued economic recovery in the US and Europe is also expected to provide positive support.

Proactive Central Banks

Highly accommodative monetary policy will be a major factor assisting economic and market sentiment. The Bank of Japan has pledged to maintain a very loose policy to combat deflation, cutting the base rate in January 2016 to a negative 0.1percent for the first time. Other central banks have also indicated their strong intention to keep interest rates low to stimulate economic growth. Some – such as China, India, New Zealand and Taiwan - have trimmed rates further in recent months whilst Bank of Korea and the Reserve Bank of Australia are also indicating potential further interest rate cuts amidst declining inflation expectations in both economies.

As a result, credit market conditions are improving in most of Asia’s major economies (with the exception of Singapore and Hong Kong). Private sectors and households are borrowing more for investment and consumption, which in turn should feed through to more economic activity.

In Japan, the weaker yen has boosted tourism, with international visitor numbers reaching an all-time high in 2015. Rising new export orders, the expansion of private consumption and a strong labour market underpin a better outlook for Japan over the next 12 months. Although Japan slipped into a technical recession in the third quarter of 2015, gross domestic product (GDP) growth is expected to rebound to 1.2 percent in 2016.

Pressure on Singapore Hong Kong and South Korea

A similar story of improving domestic conditions is unfolding in Australia against a backdrop of rising employment. While the mining-related sectors continue to struggle, financial and business services are doing relatively well. Buoyant housing market conditions, meanwhile, support household consumption, particularly in Sydney and Melbourne.

Whilst the overall condition of the regional economy is expected to remain stable, growth prospects will likely diverge again. China’s economy will continue to rebalance toward domestic consumption and is expected to grow at slower pace over the next few years. This will have spillover impacts on other economies in the regions, particularly Hong Kong, Singapore and South Korea. In contrast, Japan, Australia and India economies are expected to gain stronger growth momentum.

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