This time last year, we outlined the opportunity in the Asian REIT sector with Livewire in this interview. In the year to 31 May 2019, the sector has gained 28%(1). Livewire reached out to us to discuss this strong performance, what the key drivers are, and what the next 12 months could look like.
Key drivers of the Asian REIT sector
The first explanation lies in the fall in the Australian dollar, which has increased the value of overseas investments.
The second is the switch in investor sentiment in the second half of last calendar year.
The well-documented reasons, ranging from the Trump trade wars to Brexit, brought what was supposed to be a synchronised global recovery to a halt. Central banks responded by lowering rates, which has had a stunning impact on bond markets. The yield on US 10-year Treasuries fell from 2.86% at 31 May 2018 to 2.12% a year later. In Australia, the 10-year bond yield has almost halved over the same period.
This rush to safety has been a boon for interest rate-sensitive sectors generally, including REITs. The Global REIT market returned 20.02% (2) for the year to 31 May 2019 while the Global Infrastructure Index rose 18.43% (3).
As a fund manager, I can’t claim credit for the turn in circumstances that have benefited my investors. But perhaps I can claim some credit for APN Asian REIT Fund being one of the few funds in Australia that offer liquid access to the Asian commercial property markets.
The Japanese office market offers a good example. In June 2012, vacancy rates in Tokyo’s five innermost wards stood at 9.43%. Since then, they have fallen steadily, most recently to 1.64% (4)
This trend was easier to spot than the direction of currency markets or bond yields. Despite a declining population in Japan as a whole, the number of workers in metropolitan Tokyo has been growing, increasing demand for Tokyo office space. Tight supply and growing demand led to the rate of rent increases growing from 3.4% in 2017 to 8.9% in 2018 (5).
This kind of analysis drives our investment decisions, and in this case, has paid off handsomely. The earnings growth in Japanese REITs that own office properties justifies their share price appreciations. In fact, we still think there’s some way to go and have been increasing our investment in this sector within the APN Asian REIT Fund.
What you could expect in FY20
In terms of the next 12 months, I’m expecting the tenants in the buildings in which our fund invests to continue paying their rents, and for those rents to increase especially in markets where demand and supply dynamics are in the landlord’s favour.
With Asian forecast GDP growth expected to outstrip Western world GDP growth by some margin, that’s a healthy backdrop for demand and hence a big tailwind.
That’s what we’re focussed on because we have control over where we invest our investors’ money. What we can’t control is central bank policy and currency movements. Too many investors remain obsessed by short term movements in share prices, despite the fact that dividends have accounted for about half of total returns of the APN Asian REIT Fund over the long term.
Our approach is long term, focusing on the dividend income stream we receive from our REIT investments and identifying pockets of value in commercial real estate that can add to the quality and value of that income. In my experience, if you take care of that, share prices tend to take care of themselves.
The engine rooms of future performance
For the reasons I’ve explained, the 25% return in our fund is unusual. The macroeconomic tailwinds that fed these returns may or may not persist in the near term. Your guess is as good as mine on that score.
The engine room of future performance hasn’t changed since July 2011 when we launched the APN Asian REIT Fund. Asia is a growing part of global economy and will be even bigger in the years to come. The Asian REIT market, now worth over $350 billion, is evidence of this maturity.
The successful launch of the first Indian REIT this quarter was a milestone for the sector that bodes well for future growth. According to Jones Lang Lasalle, the Indian commercial property market has at least $50 billion of REIT quality assets currently.
Meanwhile, our strategy of focusing on Asia’s leading financial gateway cities of Hong Kong, Singapore and Tokyo, has delivered total returns of over 15% a year since inception for the APN Asian REIT Fund.
With many Australian investors over-exposed to our local economy, the Asian REIT sector is an attractive way for income investors to diversify into what is now recognised as the growth engine of the world.
Access a diversified portfolio of Asian REITs
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*All figures quoted in AUD
(1) As measured by Bloomberg Asia REIT Index.
(2) As measured by FTSE EPRA NAREIT Global REIT Index.
(3) As measured by S&P Global Infrastructure Index.
(4) Miki Shoji, May 2019
(5) UBS data, June 2019
(6) Returns are net of fees and expenses and are annualised for periods greater than one year. Assumes distributions are reinvested. Investors’ tax rates are not taken into account when calculating returns. Past performance is not an indicator of future performance.