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Asia-Pacific REITs

Asia-Pacific REITs (AP REITs) posted solid gains in 2019 on the back of an accommodative interest rate environment, strong operating results, and robust capital inflows. Moving into 2020, we believe that these trends should continue, providing investors continued opportunities in the asset class. In this 2020 outlook, Hui Min Ng, Portfolio Manager, outlines why the income sustainability component of REITs will be key for investors for the coming year, as well as which markets and property segments should be bright spots for investors.

Accommodative interest rate environment and resilient operating performance drove returns in 2019

AP REITs performed strongly in 2019 as the listed REITs in the region continued to show growth (organically and inorganically).  REIT markets in Singapore and Australia led the overall market higher, while the REIT segments of industrial, specialised, and office were the top sector performers1

From a macro perspective, an accommodative global and regional interest rate environment supported performance. G3 central banks set a dovish tone2, followed by numerous regional central banks in markets with REITs.

Lower rates, coupled with subdued economic growth forecasts, have resulted in a widening swath of negative yields for developed market bonds. This attracted capital inflows into the region, which further supported REIT prices. 

From a market perspective, REITs gains were driven by numerous positive catalysts. Property fundamentals remained strong as REITs in the Asia-Pacific region reported decent growth in operating metrics3 and distributable income, while occupancy rates also remained high4. Finally, numerous REIT accretive acquisitions also boosted future growth prospects.

Income sustainability key in 2020  

Moving into 2020, we believe these tailwinds should continue: accommodative monetary policy, moderate inflation, with a potential uptick in economic growth. Based on the market gains of 2019, we believe that investors should focus on the income component of REIT returns in 2020. Indeed, consistency and predictability of distribution is one of the key merits of AP REITs. As sustainability of yield continues to grow in importance, we believe that the sound fundamentals of certain segments of the physical real estate market should provide REITs the ability to deliver consistent income to investors.

Markets in Singapore, Hong Kong, and Australia can offer attractive opportunities in 2020 

We are constructive on REIT opportunities in the following key markets and segments: 

Singapore: Retail and office

Singapore narrowly averted technical recession in 20195, but the government believes growth will modestly strengthen in 2020 given the growth outlook for Singapore’s key final demand markets, and the projected recovery in the global electronics cycle in the year ahead6. With capital inflows to Singaporean REITS remaining supportive, we are comfortable with general valuation levels in the market.

  • Retail: Historically, rental rates in Singapore’s retail sector have been defensive and resilient; we expect this trend to continue. Indeed, median rental pricing trends over the past three years have remained steady despite increasing economic volatility.  Furthermore, a notable increase in supply in 2019 was well digested by the market, with forecasts of new supply coming in the pipeline remain relatively limited in the next three years7. Besides, we will also be closely watching the trajectory of “omni-channel”8 and experiential retail strategies, which we think should be supportive for the retail segment.
  • Office: Overall, the supply and demand dynamics are expected to remain positive in 2020.  While demand has softened, we believe spot rents can hold up as net supply remains low. Some existing central business district (CBD) supply will be removed from the market due to re-development under the government’s Urban Renewal Project. We expect that rental reversions should continue to stay positive as current spot rates are higher (over the past three years office rents have moved higher)9.

Hong Kong: Office and retail

Hong Kong’s economy experienced a challenging year in 2019 and we’re still monitoring its trajectory for 2020.  That said, we’re still constructive on more defensive plays in the office and retail segments.

  • Office: As corporates move their offices from traditional business centres, we continue to focus on opportunities in decentralised Grade-A office space given the notable spot rent differentials with more traditional business districts (e.g. Central). 
  • Retail: Although retail sales have notably contracted in Hong Kong, the performance of Hong Kong REITs has a fairly low correlation with retail sales10.  We are currently constructive on shopping malls that are geared towards meeting consumers’ everyday needs such as supermarkets and food rather than luxury offerings. These properties are more resilient and defensive in an economic downturn.

Australia: Office and industrial

Despite the Reserve Bank of Australia’s monetary easing in 2019, we are closely watching if it flows through to boost the real economy. With economic activity depressed and unemployment levels elevated, we are looking for opportunities in well-established segments.

  • Office: Supply and demand dynamics are currently favourable in the office segment. This is particularly true for Grade-A office space in Sydney’s CBD area, where limited new supply is forecast over the next two years11.
  • Industrial: Third-party logistics and e-commerce firms are the main source of demand in this segment, which is gradually digesting excess supply. 

Conclusion 

Overall, we expect many of the supportive trends we saw 2019 should continue to underpin to AP REITs in 2020. The favorable macro backdrop should allow REITs in the region to further enlarge their asset bases for future growth.  

Given the transparency of REIT portfolios, we see few risks to rental income, as positive rental reversions and robust occupancy rates should continue in 2020. This backdrop should result in a stable and highly secured distribution income for shareholders.

Hui Min Ng, Portfolio Manager
  1. Bloomberg, as of 30 September 2019. Market performance represents the arithmetic average of all listed REITS in the individual market.  Segment performance represents the performance of all listed REITS regionally for the segment.  
  2. The US Federal Reserve (Fed) retreated, cutting rates after nine increases between 2015 and 2018. The European Central Bank decided to reignite its QE programme less than a year after pausing it. The Bank of Japan reminded investors that its negative-rate policy could go beyond the current minus-0.1%. 
  3. Manulife Investment Management, company websites, as of 30 September 2019.
  4. Manulife Investment Management, company websites, as of 30 September 2019.
  5. The Singapore economy grew by 0.5% on a year-on-year basis in the third quarter, slightly higher than the 0.2% growth in the previous quarter. Ministry of Trade and Industry (MTI), Singapore, as of 21 November 2019.
  6. MTI expects growth in the Singapore economy to pick up modestly in 2020 as compared to 2019, 21 November 2019.
  7. URA, Release of first quarter 2019 Real Estate Statistics, from 30 June 2015 to 31 March 2019.  
  8. Offline to online.
  9. Capitaland Commercial Trust, Nov 2019.
  10. Bloomberg, from 31 August 2016 to 31 August 2019.  
  11. JLL, Research Actual and Dexus Research Forecast, 6 February 2019. 

Disclaimers

Investing involves risks, including the potential loss of principal. Financial markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. These risks are magnified for investments made in emerging markets. Currency risk is the risk that fluctuations in exchange rates may adversely affect the value of a portfolio’s investments.

The information provided does not take into account the suitability, investment objectives, financial situation, or particular needs of any specific person. You should consider the suitability of any type of investment for your circumstances and, if necessary, seek professional advice.

This material, intended for the exclusive use by the recipients who are allowable to receive this document under the applicable laws and regulations of the relevant jurisdictions, was produced by, and the opinions expressed are those of, Manulife Investment Management as of the date of this publication, and are subject to change based on market and other conditions. The information and/or analysis contained in this material have been compiled or arrived at from sources believed to be reliable, but Manulife Investment Management does not make any representation as to their accuracy, correctness, usefulness, or completeness and does not accept liability for any loss arising from the use of the information and/or analysis contained. The information in this material may contain projections or other forward-looking statements regarding future events, targets, management discipline, or other expectations, and is only as current as of the date indicated. The information in this document, including statements concerning financial market trends, are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Manulife Investment Management disclaims any responsibility to update such information.

Neither Manulife Investment Management or its affiliates, nor any of their directors, officers or employees shall assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained herein. All overviews and commentary are intended to be general in nature and for current interest. While helpful, these overviews are no substitute for professional tax, investment or legal advice. Clients should seek professional advice for their particular situation. Neither Manulife, Manulife Investment Management, nor any of their affiliates or representatives is providing tax, investment or legal advice. Past performance does not guarantee future results. This material was prepared solely for informational purposes, does not constitute a recommendation, professional advice, an offer or an invitation by or on behalf of Manulife Investment Management to any person to buy or sell any security or adopt any investment strategy, and is no indication of trading intent in any fund or account managed by Manulife Investment Management. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Diversification or asset allocation does not guarantee a profit nor protect against loss in any market. Unless otherwise specified, all data is sourced from Manulife Investment Management.

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The VHIS Office recently discovered a translation error in the Chinese version of the Schedule of Surgical Procedures of the Certified Plan Policy Template. In the fracture/dislocation section of the Surgical Schedule, “clavicle” on the 8th and 12th items was mistranslated as “scapula” and “scapula” on the 13th item was mistranslated as “clavicle”. Manulife has reviewed and revised the relevant product information of Manulife’s VHIS certified plans upon the VHIS Office’s request, and has revised the Chinese version of the certified plans’ policy provisions accordingly. The English version of the policy provisions is not affected. For any enquiries, please contact Manulife’s service hotline at 2108 1188.

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