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Market Outlook 2019: Australia and Japan Take Lead

Market Outlook 2019: Australia and Japan Take Lead

Hong Kong Office REITs with exposure to non-CBD locations and Singapore Industrials seen withstanding headwinds in wider economy

By Victor Yeung, Chief Investment Officer, Admiral Investment

 

Our top country picks for 2019 are Australia and Japan. We are less positive on Hong Kong and, to a lesser extent, Singapore because both economies, which are heavily trade-dependent, are in the process of adjusting to a new normal due to the U.S-China trade frictions.

Although Japan has seen negative economic growth in recent quarters, this contraction is merely a reflection of the country’s structural population decline. One reason to be positive is that the consumer price index, a key indicator for inflation has remained in the black for more than two years. While Japan’s plan to increase its consumer tax in the second quarter of 2019 could put the brakes on growth, government policies such as public works, tax alleviation measures and temporary reward programs for cashless shopping will help to offset some of the negative impact.

 

Growth seen for J-REITS in hospitality and retail

Other positive growth catalysts include the Tokyo Olympics in 2020 and the Osaka World Expo in 2025. These events as well as potential casino resort projects will contribute to the development and refurbishment of Japan’s infrastructure and provide a tailwind to tourist arrivals and retail spend. For these reasons, we favour Japan REITs that are exposed to the hospitality and retail sectors.

In Australia, both economic and inflation growth rates have been slowing gradually. Nonetheless, growth has remained positive with annualised exports expanding at 11%. Coupled with government-led infrastructure development programmes and falling unemployment, Australia’s economy continues to look very healthy.

 

Low vacancy in Australia

Australia’s real estate sector has been in a rental up-cycle since 2016. Data from the Property Council of Australia showed that office vacancy has been at new lows across the country, and this has contributed to a record high rent of A$1,800 per square meter per year being reached in Sydney. Both rental and investment demand are spreading from core regions to non-CBD areas in Sydney and Melbourne.

Australia’s rental growth rates may slow in the near future due to an easing economy as well as increased supply of new offices coming into the market, especially in Melbourne. Nonetheless, we like Australia for its stable and steady growth market.

Singapore and Hong Kong are highly exposed to global trade and are unlikely to escape unscathed from the U.S.-China trade tensions. Both markets will need to find new growth drivers in the current challenging environment.

Trading and logistics, financial services, professional and producer services, and tourism are the four pillar industries in Hong Kong. Effects of the turbulence caused by the U.S.-China trade row since early 2018 has started to appear in 3Q 2018 data. Imports and exports growth, retail sales and visitor arrivals all recorded their lowest levels in recent quarters.

 

Singapore and Hong Kong highly exposed to trade tension

As an entrepot, Hong Kong’s trade activities are likely to reduce further in 2019. Due to a high-base effect and slower growth in China, tourism is also likely to retard in the coming year. We expect real GDP growth of 2.5%-2.7% in 2019-2020, a nearly 1% drop from that of 2018.

Our preferred Hong Kong-REITs are those holding office space in non-CBD locations that cater to MNCs, professional service firms and new tenants seeking low-cost solutions. We also like REITs that are exposed to the suburban shopping mall segment that serves domestic demand.

Similar to Hong Kong, Singapore faces pressures from a less open global trade landscape. We expect its economic growth to slow gradually from above 3% in 2018 to 2.7% and 2.4% in the following years. A soft housing market resulting from government policy to rein in price appreciation, and the likelihood of Singapore dollar rising further due to higher interest rates will pose further downside risks.

Despite slowing economic growth, demand from existing firms and new setups in the value-added manufacturing sector will likely continue to rise, supporting industrial rents. As a result, we favour REITs in this sector.

 

Volatility gives rise to entry points

On balance, geopolitics which became a dominant factor influencing market performance in 2018 will likely continue to play an outsized role this year. Beyond financial market impacts, which led to most markets closing the year in the red, trade tensions have also resulted in worsening economic circumstances and consequently property rent and capital values.

That said, equity and REIT markets have priced in some level of uncertainty, and we expect a resolution to emerge between the U.S. and China that would lift some of the palls that have been cast. Uncertainty doesn’t necessarily translate to a bear market as news flow can be both positive and negative. The core expectation is that 2019 will be an eventful and volatile year.

Rather than steering clear of markets, investors should adopt a long-term investment horizon. Given the attractive valuations available today, it could be a good entry point to deploy capital into REITs and equities.

 

About the author:

Victor Yeung is Admiral’s founding managing partner and chief investment officer.  Since 2013, he has been responsible for our overall firm strategy and day-to-day management of our funds. From 2007 to 2013, Victor was with LaSalle Investment Management, where he managed the Asia Pacific portion of the US$10 billion Global Real Estate Securities program and eventually became its Managing Director, Asia Pacific Securities. He writes regular columns for various news media in Hong Kong, Singapore and Taiwan, and he is a co-host of a REIT commentary segment on Hong Kong’s Now TV.  He has written one English and three Chinese books on REITs and other real estate topics.