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Asia Pacific  Download PDF
March 31, 2008
We are pleased to share with you our review and outlook for the Asia Pacific real estate market as of March 31, 2008. For the quarter, the total return for the FTSE EPRA/NAREIT Asia Index was –16.4% as measured in U.S. dollars. In local currencies, the total return was –20.2%.
Investment Review
Asia Pacific real estate securities had a significant decline in the first quarter, underperforming the United States and Europe after outperforming both by a wide margin in 2007. While Asia’s markets were strong through much of last year, it became apparent they were not immune from the economic and credit worries that were weighing heavily on markets elsewhere. The “re-coupling” theme was evident in the quarter, with all the region’s markets declining amid slowing global growth and more unsettling news from major banks. Despite these concerns, Asia’s economies remained healthy.
Hong Kong, one of the strongest global markets in 2007 (up nearly 60%), had a total return of –24.3% in the quarter. Concerns over the U.S. credit markets and the global economy, along with expectations of further tightening measures in China, hindered stocks. Investors were also concerned that Hong Kong interest rates have little room left to fall. Local banks have been cutting rates in response to aggressive rate reductions in the United States, as Hong Kong’s currency is linked to the U.S. dollar. The savings deposit rate in Hong Kong is now virtually zero and real interest rates (adjusted for inflation) have become even more negative.
Japan (–19.8%) struggled amid signs of a slowing U.S. economy and a weakening dollar, trends that could stall Japan’s economic recovery. Fundamentals remained firm, however, with vacancy rates in Tokyo’s central office market stable and low (below 2%). Average asking rents in key Tokyo wards continued on an uptrend, rising more than 1% in February. There was also evidence that housing construction may be rebounding after plunging in the second half of 2007 due to the poorly managed implementation of a building standards law revised in June.
Singapore (–7.2%) outperformed within Asia, although returns were negative. Property developers were the poorest performers amid concerns over Singapore’s slowing housing market. Singapore REITs performed relatively well due to their defensive characteristics in a period of volatility. On the economic front, growth has slowed; final fourth-quarter GDP data showed that the economy grew 5.4% year-over-year, down from 9.5% in the third quarter.
A confluence of negative factors weighed on Australia (–18.5%). The quarter started on a weak note as concerns lingered from Centro’s fund management crisis in December. While a company-specific event, it caused investors to question the defensive nature of Australian listed property trusts. Some disappointing earnings reports and dividend cuts also hampered the market. In February, the Reserve Bank of Australia raised its benchmark interest rate to 7% in an attempt to rein in inflation as economic growth picked up.
U.S. dollar investors benefited from favorable exchange rates, as the region’s currencies strengthened against the dollar in the period. The currency impact was strongest in Japan.
Our portfolios declined but outperformed their benchmark in the quarter. Factors that aided relative performance included stock selection in Hong Kong, Japan and Australia, although our overweight in Hong Kong and underweight in Australia partly offset stock selection. Our underweight and stock selection in Singapore detracted from relative return.
Investment Outlook
Japan’s real estate securities market is now the cheapest in the world, with discounts to net asset values in excess of 40%. Investors are clearly concerned that weak consumer spending, a strong yen and the rising cost of raw materials will weigh on the economy and, ultimately, property values. That aside, we continue to see compelling opportunities, particularly among financially sound large companies with healthy development pipelines. We believe that even in a slow-growth environment, low supply and tight occupancies in Tokyo should continue to support rental growth.
Recent performance notwithstanding, Hong Kong, in our view, stands to benefit from increased demand for space in a growing economy (2007 GDP growth was reported at 6.3%), limited new supply and materially negative real interest rates (adjusted for inflation). We are relatively cautious toward Singapore, particularly its residential market, although we expect the hotel sector to be strong, with incentives in place to boost tourism. Our allocation to Australia is tempered by relatively high valuations, monetary policy headwinds and higher borrowing costs for Australian property companies.
(1) Country returns are in local currencies as measured by the FTSE EPRA/NAREIT Asia Pacific Real Estate Index.
The views and opinions in the preceding commentary are as of the date of publication and are subject to change. This material represents an assessment of the market environment at a specific point in time, should not be relied upon as investment advice and is not intended to predict or depict performance of any investment.
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