Investment
23 February 2021

Asia set to power real estate recovery

By Andy Wong

Research Analyst

2020 was a difficult year for Asian real estate stocks as strict lockdown measures weighed on the sector.

Human traffic to hotels, retail malls and offices saw stark declines as work-from-home and e-commerce trends accelerated.

Sector performance was understandably bifurcated as real estate players with significant exposure to logistics and data centres outperformed hospitality, retail, and offices. The residential sector also proved surprisingly resilient, given the low interest rate environment.

While 2020 was grim, 2021 appears decidedly optimistic, especially for the Asia real estate sector, buttressed by more effective containment of Covid-19, gradual rollout of vaccination programmes across the region and undemanding valuations.

Real estate a key beneficiary of reflation trade

From the outset, Asian economies are expected to lead the global economic recovery.

According to Bank of Singapore projections, China’s economy is expected to expand 8.1 per cent this year while the rest of Asia is forecasted to grow at an annual pace of 7.9 per cent. This is higher than our global GDP growth forecast of 5.9 per cent.

With the rollout of vaccination programmes globally, a gradual return to normalcy from 2H21 onwards can be expected. This will likely benefit the real estate sector as footfalls and tenant sales in shopping malls gradually recover while physical occupancies in offices increase with the relaxation of social restrictions in time to come.

Meanwhile, logistics and data centres will continue to benefit from the tailwinds of higher e-commerce penetration rates and widespread adoption of technology - secular growth trends that have only accelerated with the pandemic.

Given that markets are generally forward looking, near-term equity prices may increasingly reflect such buoyant expectations, although volatility and uncertainties are expected.

Historically, earnings of cyclical sectors such as real estate have been more sensitive to economic growth. Given the positive economic backdrop, we expect earnings of the real estate sector to rebound, while the focus on reflation should keep the outlook well-supported.

Real estate is also well-placed to ride out inflation concerns, as it is traditionally seen as a good hedge against inflation.

Hunt for yield to continue

Even with the recent spike in the 10-year US Treasury yield, real yields remain negative.

This, alongside the lower for longer interest rate environment, should continue to drive the hunt for yield, in which case the real estate sector is poised to benefit.

For one, the MSCI Asia ex-Japan Real Estate Index offers higher dividend yields relative to its peers in the US and Europe. Nevertheless, investors should note that dividends are not sacrosanct.

Hence a bottom-up stock picking strategy to evaluate the longer-term sustainability of dividend payments should be a key consideration when investing in real estate stocks.

Robust longer-term demand drivers

Robust demand drivers underpinned by favourable demographics, rising urbanisation rates and a growing middle-class should benefit the Asian real estate sector over the longer term.

According to projections by the United Nations, Asia’s urbanisation rate is estimated to increase from 51.1 per cent in 2020 to 56.7 per cent in 2030 and 66.2 per cent in 2050.

Urbanisation rates between 2020 and 2030 is expected to be the strongest in Asia relative to other major regions, with China leading the charge.

In fact, real estate has been a firm bright spot for the Chinese economy. The sector has weathered through the Covid-19 storm exceedingly well, with real estate fixed asset investments rising 7.0 per cent year-on-year (YoY) to RMB14.1 trillion in 2020. Overall residential transaction value jumped 10.8 per cent YoY in 2020 to RMB15.5 trillion, driven by both volume and price increase.

Singapore’s property market also shines through for its resilience. Prices of private residential properties rose by 2.2 per cent in 2020 despite the 5.8 per cent contraction in its real GDP, according to the URA.

Singapore’s private residential property prices is likely to increase between 2 per cent and 4 per cent in 2021, underpinned by a steady recovery in the region, a recovering labour market, the low mortgage rate environment, potential return of foreign buyers and higher expected construction costs due to Covid-19.

We are also beginning to see green shoots of recovery for suburban retail malls. The entry and future expansion of giant Chinese technology firms in Singapore could also alleviate some pressure from the consolidation of office spaces by companies amid the ‘work from home’ trend.

Singapore’s data centre market will also benefit from healthy demand and supply dynamics as the government explores ways for renewable energy sources to be used for future data centres here.

These examples underscore the fact that Asia is far from homogenous. Demand and supply dynamics for the real estate sector are highly localised and can differ markedly across countries.

Undemanding valuations

Valuations-wise, Asia ex-Japan real estate stocks remain undemanding and may benefit from the growth-to-value rotation.

As it stands, from a forward price-to-earnings (P/E) basis, the MSCI Asia ex-Japan Real Estate Index is trading near its trough. Its current 0.7x forward price-to-book (P/B) ratio is one standard deviation below its past10-year average, which is attractive in our view.

Rebound to help drive inorganic growth

Relaxation of border and social restrictions on the back of widespread inoculation, in addition to ample liquidity and recovering risk appetites, should provide a constructive backdrop for the return of investment activities and deal flows in the real estate sector.

These took a severe hit last year as many countries imposed severe lockdowns. The resumption of sales and acquisitions of properties will help to drive inorganic growth in the sector.

As it is, real estate market observer Jones Lang LaSalle (JLL) highlighted in its recent Asia Pacific Capital Markets 2021 outlook report that it expects real estate investment volumes in the Asia-Pacific region to increase between 15 per cent and 20 per cent in 2021.

Risk factors to watch out for

While we are positive on the real estate sector in Asia, it would be prudent to bear in mind the risks.

The path to normalcy is likely to be uneven and bumpy, and the pace of the economic recovery will largely depend on how fast Covid-19 vaccinations are rolled out globally.

Investors should look for real estate players with strong balance sheets, that are well-positioned to ride out this period of uncertainty. They should also be mindful of shifting policy risks on the residential front, as governments may step in with property cooling measures in line with the need to keep housing affordable.

For instance, the Chinese government had recently warned that “housing is for living in, and not for speculation”.

It introduced new measures such as the “three red lines” financing rule in August last year in a deleveraging drive and imposed further restrictions on real estate related loans including mortgages recently.

In Singapore, macroprudential policies have been in place for several years to ensure that the appreciation of home prices is kept in line with economic fundamentals.

An edited version of this article was published in The Straits Times on Feb 20, 2021.

Asia set to power real estate recovery

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Version: July 2020