Asian investors have expressed caution on the region’s property markets as fears grow for global growth and the impact of inflation on investment returns.
“Like other sovereigns we are cautious: real estate is less attractive at the moment. Rising rates and bond yields, mean a higher cost of capital and a higher bar [for property investments],” said Toby Selman, who leads global real estate strategy at the New Zealand Superannuation Fund (NZ Super).
But Selman said more liquid property investments remained attractive on a case-by-case basis and Japan’s property sector continued to appeal.
“We are searching hard for the right transactions: listed REITS are relatively attractive compared to private markets. We still find Japan attractive: there is a positive rent yield-against-debt spread, which is not the case in many countries,” he said.
He added that activity in China for the fund was muted, in part because the lockdowns had curbed foreign investment, reducing liquidity available in many property assets, and limiting the ability of investors in New Zealand to completed due diligence visits.
HARD YARDS IN ASIA
Danny Phuan, head of acquisitions, Asia Pacific, and head of China, at Allianz Real Estate, said that the fund was having to work harder to find suitable opportunities in Asia.
“Asia continues to be an important destination but the global environment has changed. Inflation is a concern as is geopolitical tension within Asia and [rising] interest rates are something that keeps me awake at night. We want to be more careful on how we underwrite and do deals. We are not going to invest for the sake of investing,” he said.
He said that the fund still used the same methodology for investments but that it was monitoring developments on the ground and would consider its approach to investments if appropriate. Although he declined to give further details, he pointed to the attraction of residential property as a hedge for inflation.
“With leases of one to two years, [assets] get marked to market often and rental [prices can] align with inflation,” he said.
RESIDENTIAL INFLATION HEDGE
Selman noted that, while property could provide some protection against inflation, its effectiveness varied from sector to sector.
“Real estate is an imperfect hedge against inflation: it only works if you have pricing power,” he said.
He pointed to residential property, where shorter leases allow investors to pass on inflationary increases more quickly than logistics, where leases were typically longer. However, he said there were risks associated with passing on price rises too quickly. “If you put [residential] rents up too high, people can just leave,” he said.
Robert-Jan Foortse, APG’s head of European real estate, echoed the risks of increasing rents in residential portfolios to combat inflation, focusing on social and political concern about housing affordability.
“Conceptually, multifamily offers inflation protection as well, especially in the long term but there is a point in the short term where affordability may become an issue,” he said.
He disagreed with Selman about logistics use as an inflation hedge, highlighting tenants’ low operating exposure to rents.
“With respect to rising inflation we seek exposure to sectors where tenants can absorb higher rents, like logistics – where property costs often represent 5% to 10% of the operational costs of the tenants.”
EQUITES INFLATION PROTECTION
Fiona Mann, head of listed equities and ESG at Brighter Super, the A$31 billion Australian superannuation fund revealed a differentiated approach to global equities in light of the growing threat to returns posed by inflation.
She told AsianInvestor that active managers’ ability to select sectors or businesses that were able to pass on price increases to customers would be important.
“[When selecting companies], are they considering elasticity of pricing in that industry and can the businesses pass on costs that supply chain to their customers?” she said, highlighting sectors characterised by duopolies or oligopolies (a small number of participants controlling the majority of business).
“In downturns, you want active portfolios to pick businesses that have sustainable earnings,” she said, pointing to software businesses that enjoy steady revenues from licencing fees.
Mann contrasts these with companies with little or no pricing power, such as low-end apparel manufacturers or grocers, whose businesses are likely to suffer from increasing inflation.
“If everyone is making white T-shirts, you can’t put your prices up. And grocers are a low margin business already,” she said.