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M&G: APAC returns ‘modest’ without rental growth – Exclusive

Overall, the Asia Pacific real estate market is expected to deliver 9.8% returns in 2017, but going forward returns will stagnate without uplift from strong rental growth, the real estate investment firm has forecasted.

Real estate in Asia Pacific is expected to deliver strong returns (9.8 percent) in 2017 but performance will trend sideways over 2018 and 2019, according to the latest forecast from M&G Real Estate exclusively seen by PERE.

The report from the real estate fund management arm of M&G Investments said that the good returns being delivered in 2017 is largely due to yield compression. But, this compression will slow and total returns at expected to become relatively modest unless there is an uplift from strong rental growth.

M&G pointed to the Sydney and Melbourne office markets as the most attractive due to rental growth forecasts, while Singapore industrial and the office sectors in Hong Kong and in Perth are likely to lag the most.

Despite the threat of stagnating returns, M&G’s report said that investor appetite for the region has not dimmed.

“We see a lot of allocation from Europe, and interest from the US in the institutional market as APAC has traditionally been an underrepresented region in their portfolios,” Chiang Ling Ng, chief executive and chief investment officer of M&G Real Estate Asia, told PERE.

“Over the years more players have entered the core markets in Asia and having those advocates helps with acceptance and awareness for other investors.”

A positive economic outlook for the region is also providing investors with comfort, said Ng. Overall Asia Pacific economic growth estimates for 2017 have upgraded slightly to 4.8 percent from 4.6 percent, still higher than the forecasts for North America (2.1 percent) and Western Europe (1.7 percent).

“Improvements in global trade and therefore higher export growth were the key drivers behind the recent uplift in economists’ growth expectations for the region,” said Ng.

M&G makes its Asia investments using capital from its open-ended real estate fund. It currently holds 22 assets across Australia (34.2 percent of the portfolio), Japan (18.1 percent), Singapore (23 percent), South Korea (17.9 percent) and Hong Kong (5.5 percent).

The fund has a net asset value of just north of $2 billion and generated a rolling 12-month local currency total return of 10.2 percent, with 4.6 percent coming from income and a 5.6 percent capital return, at 31 March 2017.