Looking back, the defining characteristic of 2018’s equities market is probably the fact that geopolitical influence on market performance. The escalation of trade disputes between China and the US since 2Q18 affected both the capital markets and the real estate markets. MSCI Asia Pacific had been down 9.4 percent in 2018, and 16 percent down from its peak in January 2018.
REITs, on the other hand, had demonstrated their ability to deliver returns. Year-to-date, Asia Pacific REITs have returned 3.4 percent, outperforming the MSCI Asia Pacific index by 12 percentage points. GPRAprea Invesable REIT Japan, in particular, has outperformed MSCI Japan by 18 percentage points, as investors expect Japan’s sustained inflation since 2016 would continue to support rental growth in commercial properties in Japan.
For 2019, we believe that investors should be prepared that geopolitical news will continue to dominate headlines and impact stock markets worldwide in the foreseeable future. Ultimately, tariffs and other trade disputes can weaken economic performance, which in turn will weaken rental growth.
With geopolitical uncertainty, increasing risk premium investors seek will make its way in the pricing of equities in equity markets. Reaching a resolution, such as a signed agreement between the US and China, is perhaps as important as the details of the resolution.
As governments negotiate and see common grounds, newsflow can be both positive and negative, creating price volatility in all asset classes. Uncertainty, though, does not necessarily mean downward trends.
This does not mean investors should stay away from the market, but instead, should take a long term view with the capital they do choose to deploy. For example, given the investment periods of real estates are long term, anywhere from 5 to 10 years and beyond, volatility in the market can induce more capital to be deployed to real estate equities and real estate debts.
Major sovereign wealth funds and pension funds have also invested in emerging alternative assets such as data centers, student housing, and even manufacturing homes (i.e. trailer parks). The cap rates can be as much as 200 basis points higher than the core asset classes, and in some cases, investors may expect the alternatives to be institutionalise like logistics and hotels did 20 years ago. This would provide an one-time cap rate compression that benefits earlier investors.
Other institutional investors and family offices are also looking at real estate debts. A two-to-three year debt instrument with a reasonable interest rate can provide investors a steady return over the next two to three years without taking explicit views on real estate prices. Investors can re-evaluate the situation in two to three years when the principle is returned.
Retail investors may not have the same access to these more exotic forms of real estate investments. In this case, the most appropriate way to maintain real estate exposure may be through a real estate portfolio with well diversified geographic exposure.