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SURVEY: Investors Expect Recovery After 6 Months; Valuations To Fall (PART 1)

Investors Expect Recovery After 6 Months; Valuations To Fall (PART 1)

(Part 2 of survey will be published next week)

REIT AsiaPac conducted a mini survey in June of this year in which we asked Asia-Pacific REIT fund managers and market participants for their views on the sector’s recovery amid the on-going impact of the pandemic. The following summarises what they said:

1. Majority sees Asia Pacific recovery after at least 6 months

Question: When will the REIT markets recover?

While 37.5% of fund managers see recovery in 3-6 months, the rest say recovery will take longer. 

“[Covid-19] resulted in huge fluctuations in market valuations, but this should stabilise over time,” said one fund manager.

At the onset of travel  restrictions implemented to curb the spread of the global pandemic in March and the resulting dislocation of the global supply chain, both real estate investment trusts (REITs) and equities in Asia Pacific were down by double digits. An analysis from Hong Kong-based Admiral Investments showed that the top 100 most-traded REITs in the region were down by 24%, while equities slumped by 12%. 

By sector, the hotel industry suffered the most during the month, according to Global Property Research data. Hotel REITs were down 40% during the month, followed by retail’s 32% decline. 

By April, however, both Asia Pacific REITs and equity markets had recovered; REITs were up 7%, while equities climbed 9%. During the month, gains were recorded across all REIT sectors with the most notable recovery seen in the hotel sector, which climbed 17%, while retail rebounded by 15%. But the path ahead remains uncertain. 

 

RED: GPR/APREA Composite REIT Index | BLUE: MSCI AC Asia Pacific Index
source: GPR

Recovery in the second-half is seen likely for some, while others prefer to err on the side of caution. According to Knight Frank, the markets in the Asia Pacific will likely benefit from the recovery in China. 

“The second half of the year is very much likely to be an Asian story,” said Neil Brookes, Head of Capital Markets in the Asia Pacific at Knight Frank. He said Beijing and Shanghai remain the top choices for investors, adding that a “slightly unusual quirk” of the Covid-19 situation is that China has become the core safe-haven market in the Asia Pacific. 

The capital markets executive also said that their consultancy has already seen “increased interest from Singapore-based investors going into China,” adding that “feedback from our major regional clients is that acquisitions are firmly on the agenda.”

Others are less optimistic. “For real estate to recover, we need more policy responses and support from the labour market,” Laura Dietzel, a senior real estate analyst at RSM Partner said in an interview with Preqin. “A sustained, true recovery will only be able to be able to occur when consumer confidence is back,” she said. “We can be cautiously optimistic, but I don’t think H2 (second-half of 2020) is going to rebalance the market.”

2. Industrial Remains The Most Attractive REIT Sector

Question: In which REIT sectors are you interested to invest?

The industrial sector was the top choice of Asia Pacific fund managers for investment following amid the pandemic. 

Fund managers particularly cited REITs with leanings toward the logistics and data center sectors as the most attractive investment destinations in light of the coronavirus pandemic. Office landed the second spot in the survey. Fund managers say office REITs are good for “medium-term” investments. Retail came in as the third most attractive REIT sector in the survey, followed by hospitality. Some fund managers particularly cited retail as a good “short-term” investment. 

Retail REITs have been one of the most affected in Asia Pacific with the pandemic accelerating the impact of e-commerce.  At the height of widespread restrictions in March, data from Global Property Research showed that the retail sector performance slumped by 31.9% while the hotel industry fell 39.8%. Still, some retail malls have managed to gain a new lease of life by being converted into warehouses, or city fulfillment centres and the trend is seen to be gaining momentum. As more people shop online and expect delivery of goods within a few hours, so-called large-format retail properties close to major cities could have a higher and better use as last-mile logistics facilities, according to JLL.

3. Australia And Japan REITs Most Attractive To Investors In Asia Pacific

Question: In which countries are you interested to invest?

Fund managers heavily favoured Australian REITs for investment amid the global pandemic with Japan a close second.

Aside from being known as safe haven economies for REITs, Ascott Residence Trust also noted that these two countries were among the first to ease restrictions and thereby provided positive sentiment for hospitality REITs in both jurisdictions. 

“In Australia and Japan, domestic travel campaigns have been rolled out to encourage locals to travel, and in Australia and Singapore, international borders are set to gradually reopen with the formation of travel bubbles. These developments are positive for the tourism and hospitality sectors,” Ascott said in a statement to unitholders. 

Hong Kong and Singapore were the third and fourth top REIT investment destinations, according to the survey. 

Fund managers also cited China, Taiwan and South Korea as among the potential REIT investment destinations. 

4. Healthy Balance Sheets Emerged As Top Consideration In Investing 

Question: How will the Covid-19 pandemic change the way you invest in REITs?

How REITs manage their balance sheet in times of crisis is a top consideration for investors as they consider where to put their money.

“[There is] greater focus on cash flow security, credit quality, and balance sheet strength,” a fund manager said in the survey. “[We will] be more selective for REITs with healthy balance sheets and stable rental structures,” another said. 

Fund managers also expressed optimism that REITs, in general, are poised to handle the negative impact of the pandemic.

“Structurally, there has been a huge shift to activity being conducted electronically. It is probable that a sizable part of this will endure beyond the lockdowns,” a fund manager said. 

Others also indicated sector allocation changes as part of their adjustments to the post-pandemic investment environment. 

It changes sector preferences, but in Asia, the impact won’t be as large structurally as elsewhere,” a fund manager said. 

Some managers, however, said there will be no changes in the way they invest in REITs post-pandemic. 

At the end of the day, investors looking for yield in the post-pandemic era will rely on REITs’ proper disclosure.  “The better visibility, the more trust, the better upside,” a fund manager said. 

5. Real Estate Valuations Expected To Decline Further

Question: What are your views about current real estate valuations?

Real estate valuations in Asia Pacific are projected to drop further in the coming months. Among the most recent transactions was property developer OUE Limited’s sale of US Bank Tower for US$430 million announced on July 17. The sale price is about two-thirds of the asset’s US$650 million fair value as at Dec 31, 2019, according to OUE’s latest annual report. In a separate transaction, Hong Kong’s New World Development in May agreed to sell the podium levels of the Cosco Tower in Sheung Wan area for 45% less than the asking price three months earlier.

Most fund managers agree that current real estate valuations are still high. “They ought to be marked to market, taking government bond/interest rates into account,” one asset manager said.

“[Assets are] overpriced across all sectors so [we] will see cap rates soften. Those with more cash flow pressure can expect larger declines. Industrial/logistics may compress, but looks very expensive relative to others,” a fund manager in Australia said. 

“Valuations in direct real estate will fall, with the magnitude of the fall depending on what sector you’re talking about. REIT valuations have already adjusted for a lot of that near-term downside,” a Singapore-based investor said. 

“[We are] expecting some decline in value due to cyclical reasons like weaker economic growth,” said Maydew. “Some hotel and retail REITs have reported double-digit mark downs in property values. Longer term, valuations should reflect economic value that will be impacted tactically and structurally by Covid,” said another.

Retail, office, and hotel assets have downside risks, said Shinkawa. Separately, Steven Pan, chairman of Taiwan-listed Formosa International Hotels Business, said in a Forbes article that he expects business “to be very challenging” from oversupply created in an era of low interest rates and easy financing. “There will be a huge – probably the biggest—consolidation” of hotel assets in the coming decade, he said.

**Part 2 will be published next week**