M&G: APAC real estate returns to dip next year onwards

As Asia-Pacific markets start raising interest rates, total returns from real estate investments will drop to less than 6 percent next year, according to a report by the London-headquartered investment manager.

Total ungeared returns for Asia-Pacific real estate investments are expected to significantly drop from 2019 onwards, as cap rate compression ends or slows across different sub-sectors, according to research by London-headquartered investment manager M&G Real Estate.

In its Asia-Pacific Real Estate Market Outlook report, the firm forecasts the region to deliver a total return – comprising income growth and capital growth – of around 9 percent in 2018. The performance is attributed to expected yield compression in Australia and South Korea, along with stable rental growth in some of the developed markets.

In 2019, however, returns are expected to drop more than 300 basis points to less than 6 percent as some key Asia-Pacific markets respond to the US fed rate hike by gradually increasing interest rates.

“Against the backdrop of an expected rise in interest rates, the key factor contributing to lower returns in APAC is the expectation that cap rates for most market sectors are expected to stop compressing or decline more marginally,” explained Jonathan Hsu, director, head of research, Asia at M&G Real Estate. “A gradual normalization of economic growth in the region could also rein in occupier demand for space and cause rental growth to moderate.”

Hsu expects all key markets tracked by M&G, namely Australia, Hong Kong, Japan, Singapore and Korea, to see returns moderating. However, the Singapore market will be more resilient due to support from rental recovery in the retail and logistics sectors.

The downward slide in returns is estimated to hit the office, retail, industrial and residential sectors in these markets. The starkest drop will be in the residential sector where total ungeared returns will drop from around 12 percent in 2018 to around 6 percent in 2019.

“Given the relatively low returns, we remain more cautious on Tokyo and Hong Kong office and retail, as yields have compressed to significantly low levels of around 3 percent – the lowest in the region,” the report went on to add.