Reallocating Asia Smart Move Real Estate Investors
Positive Growth Forecasted for Global Real Estate Market
Global real estate market has experienced a turnaround in the second quarter of 2024, with positive returns hinting at a budding recovery. After two years of cumulative losses, the low interest rate environment has caused a surge in real estate values, with global total returns reaching 5.0% q-o-q in 4Q2021 and 17.8% y-o-y in 1Q2022. However, the subsequent tightening cycle erased these gains and brought values back to 2018 levels globally.
The real estate market correction seems to be reaching its end, making it an opportune time for investors to revisit this asset class. Historically, real estate has provided stable income returns and portfolio diversification benefits over the long term, and it can offer robust returns during recovery periods. For instance, investors saw a 76% cumulative return over the next five years after the early 90s recession, 98% after the tech-wreck and 86% after the Global Financial Crisis.
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Evidence of a turnaround can be seen in global valuations, with losses moderating to 0.74% in 2Q2024, marking the lowest quarterly adjustment in the past two years. With offsetting income returns of 1.07%, global real estate achieved a positive 0.33% return, the first positive quarter since 2Q2022. Among the 15 global markets in the MSCI Global Property Index, a slight majority saw write-ups in real estate values for the first time since 2Q2022. Eight markets, including Japan, South Korea, Singapore, Southern Europe, the Nordics, the Netherlands, France and the UK experienced value increases from the prior quarter.
In addition to capital values, income returns also play a significant role in overall real estate performance. Historically, income returns have been the larger component of total returns. This trend underscores the importance of income returns in driving overall performance in the real estate sector, highlighting the need for investors to focus on both capital and income aspects when evaluating real estate investments.
Total returns, which combine both capital and income returns, were positive in 12 of 15 countries in 2Q2024. They were flat in the US (–0.09%), slightly negative in Ireland (–0.22%), and significantly negative in Australia (–3.07%). Preliminary NCREIF ODCE index data showed US total returns turning positive at 0.25%, and with values beginning to rebound, we expect this positive trajectory to continue.
In terms of fundraising, global real estate investment shows signs of a potential recovery after two slow years. In 3Q2024, China and Japan accounted for 27% and 15% of the US$7.5 billion ($10.04 billion) in cross-border inflows in Asia Pacific. However, these countries could face challenges. Over half of Japan’s inflows were from global sources, while most of China’s came from within Asia Pacific, particularly Hong Kong and Singapore. Both countries face high debt costs and other factors hindering a strong rebound in real estate capital inflows.
Interest in Chinese real estate from the West has dramatically declined over the past couple of years due to geopolitical and economic concerns. This is unlikely to change soon, despite Beijing’s recent major stimulus package. The market has been stagnant due to price dislocation, geopolitical risk and lack of liquidity. Since 2021, China has faced a property crisis exacerbated by the collapse of Evergrande. Due to these risks, many European investors are avoiding China and Hong Kong, regardless of potential returns. Additionally, China’s domestic property crisis persists, with high office vacancies, low rental yields, ongoing issues with failing developers, and government interventions.
While major markets like the US have cut interest rates to boost property investment, Japan remains an outlier, with the Bank of Japan raising borrowing rates for the first time since 2007 in July to control inflation. This has prevented cap rate compression, meaning property prices haven’t risen, forcing real estate holders to rely on historically low-income yields. However, senior housing remains an attractive niche due to Japan’s aging population. Australia, on the other hand, has a significant housing shortage in its purpose-built student accommodation (PBSA) market, making it an appealing investment opportunity. Additionally, real estate debt in Australia offers favorable risk-adjusted returns due to funding gaps in construction.
Overall, the outlook for global private real estate appears to be improving. However, not all markets and property types will perform equally well, underscoring the importance of research and selectivity when investing in real estate. In an uncertain economic and geopolitical environment, additional risks are inevitable, but this applies to all asset classes. Over the past two years, the weight of real estate in investors’ portfolios has significantly decreased. Today, investors might consider fresh allocations to the private real estate market to achieve a strategic weighting and benefit from its low correlations to other asset classes, strong income returns, and a degree of inflation-hedging. With the market near its bottom, savvy investors could find excellent opportunities in this asset class.