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How long-term structural drivers are boosting real estate in the Asia Pacific region

Property markets may be facing a turning point, but long-term structural trends continue to underpin real estate in Asia Pacific, making the sector potentially attractive for overseas capital, says Jing Dong Lai, CIO and CEO, M&G Real Estate Asia
How long-term structural drivers are boosting real estate in the Asia Pacific region

Concerns around inflation and higher interest rates are reverberating in economies globally, with real estate assets facing potential repricing. Asia Pacific markets are no exception, though inflation is relatively lower, due to low direct trade exposure to Russia and Ukraine[1], supply chain proximity to China and a more measured reopening approach. As such, growth prospects in developed APAC economies are expected to remain intact, with general sentiment being less negative. The region’s growing middle class is a major driver, expected to contribute 50% of global GDP and 40% of the world’s consumption by 2040[2].

Real GDP Growth (%)

Source: M&G Real Estate based on data from Bloomberg, as of October 2022

Urbanisation is driving the need for more real estate

Stepping back from the macroeconomic noise, we believe focusing on long-term structural drivers could help to identify sustainable opportunities to grow income over time.

The region is home to some of the world’s fastest-growing cities, with continued urbanisation driving the need for more housing, offices, shopping malls, and logistics facilities. In particular, Australia’s expanding younger population is facing a major housing shortage in cities such as Sydney and Melbourne, where home ownership remained relatively unaffordable[3]. With a deep pool of accustomed renters, demand is therefore rising for professionally managed Build to Rent (BTR) housing.
Availability of stock is likely to grow with institutionalisation of BTR as early movers increasingly enter the sector. M&G has formed a partnership with Novus to develop a pipeline of high-quality apartments in well-connected key city suburbs with seed projects in Southbank, Melbourne and Parramatta, Sydney. 

Real estate requirements are evolving

High internet and smartphone penetration position Asia Pacific as a leader of economic digitalisation. With fast-growing e-commerce markets, real estate requirements are evolving. 

The rise of online shopping has resulted in a surge in demand for sustainable and efficient logistics facilities close to infrastructure or within populous catchment areas. However, modern logistics supply currently lags demand in developed markets[4]. This is likely to support rental growth prospects in the medium term, despite current upwards pressure on yields.

Cities driven by innovation could outperform

The shift towards digital industries is also fuelling a growing number of technology companies in the region. High specification buildings in locations that offer the benefit of economies of agglomeration are in particular demand, amid an expanding requirement for prime office space owing to the relatively lower impact of hybrid working in Asia.

We believe cities located in transparent markets and driven by innovation, with the ability to attract talent such as Seoul, Tokyo, Yokohama, Singapore, and Sydney are likely to outperform. M&G’s acquisition of the Minato Mirai Centre in Yokohama, within a rapidly emerging research and development hub, aims to capture this trend. The 21-storey, prime asset holds a 5-star CASBEE rating, installed with automated solar light tracking and systems to reduce heat and carbon emissions.

M&G remains focused on income

M&G’s long-established, core Asia Property strategy continues to focus on high quality real estate with resilient income potential in the current inflationary and rising interest rate environment. Prime assets in key sectors and gateway markets, including Australia, Hong Kong, Japan, Singapore, and South Korea, form the bedrock of the portfolio, which has a Gross Asset Value of over $6 billion[5].

The benefit of scale offers the ability to target buildings with high environmental standards and wellbeing features in key city locations, which often reflect larger ticket sized deals.  

Targeting higher risk-adjusted returns

Developing strong asset management capabilities and joint venture partnerships also allow M&G to target higher potential risk-adjusted returns through situational, rather than market-driven, opportunities, as part of a value-add strategy. A property may be under-managed and in need of capex, or an owner may require liquidity at a corporate level. Across the investment spectrum, a focus on strategic location and conservative deal structuring remain pivotal.

Future-proofing assets is key

Future-proofing assets is a key consideration, underpinned by rising occupier demand for sustainable buildings, increasing regulation, and the opportunity to make a positive social and environmental impact. Building improvements also have the potential to boost overall returns, since assets that are more efficient to operate can generate a higher revenue. Buildings with the highest ESG credentials, such as Heritage Lanes in Brisbane, which holds WELL platinum certification, jointly developed by M&G and Mirvac, can also benefit from lower tax obligations.     

M&G recognises the importance of being ahead of the curve on this front, with focus on ESG issues only ramping up. In this respect, M&G’s Asia Property strategy was identified as one of the best performers by sector and region in the global ESG benchmark GRESB 2022 real estate assessment[6].

Attractive risk-adjusted return potential

A pricing correction combined with stronger growth potential could offer an attractive entry point for overseas capital, in our view – particularly given the current strength of the dollar. Diversity of potential returns can also provide investment benefits, with a negative correlation between sectors and cities.

Property markets may be facing a cyclical turning point, but long-term structural trends continue to underpin Asia Pacific real estate. As such, we believe prime, sustainable assets continue to offer attractive risk-adjusted return potential.

To find out more about M&G Asia Property strategy, contact M&G Investments at [email protected]


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[1] For South Korea and Japan, total trade with Russia and Ukraine amounts to  less than 2% of  their nominal GDP. In the case of Singapore and Australia, the extent of trade with Russia and Ukraine is even smaller, with volumes amounting to less than 1% of nominal GDP. Source: CEIC, March 2022.

[2] McKinsey Global Institute, Future of Asia, July 2019.

[3] As of June 2022, housing price to income ratios across Sydney and Melbourne  are about  7 – 12 times. Source: ANZ CoreLogic Housing Affordability Report, August 2022.

[4] For instance, modern industrial stock represent less than 6% of the total logistics stock in Nayoya and 9% in Osaka, Cushman and Wakefield, August 2022.

[5] M&G Real Estate, as at June 2022.

[6] Awarded Regional Sector Leader status in the GRESB 2022 real estate assessment.


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