LaSalle Mid-Year ISA update: Asia Pacific is Likely to Lead Economic Recovery

Economies around the world have been damaged more severely than any peacetime event since World War II. Although none of us predicted a pandemic, it took this kind of tail-risk event to derail the Asia-Pacific region, the fastest growing region in the world. However, the combination of high levels of trust in Asia Pacific governments, an earlier start to the downturn and recovery, unprecedented monetary and fiscal stimulus packages, and the region’s important role in global supply chains, especially China lends resilience to the region. These macro factors, combined with high-frequency indicators, shed light upon our outlook for Asia Pacific economies and real estate markets, despite the uncertain duration of the pandemic, according to LaSalle’s mid-year Investment Strategy Annual (ISA) report.

LaSalle clients can view the full report at: https://www.lasalle.com/research/reports/2020-isa-mid-year-update 

Asia Pacific is likely to come out of the pandemic ahead of other regions due to the relative success of their public health policies. Nonetheless, like other regions, we expect to see setbacks caused by new outbreaks from time to time. LaSalle’s relative ranking of major Asia Pacific economies post COVID-19 recovery has China leading, followed by Japan, South Korea, Singapore, Australia and Hong Kong. Looking forward, larger the domestic economy, the stronger the pace of the country’s recovery is expected to be, with China, Japan and South Korea driving the recovery.

The pandemic accelerated existing trends that we have been following for many years in Asia Pacific, as well as several incipient trends, including: the rise of logistics, the demise of brick-and-mortar retailers, the market segmentation of residential properties (luxury, urban high-rise, mid-rise suburban, workforce, active adult, etc.), the mainstreaming of alternative or niche sectors, and the rising importance of technology as a driver for many real estate decisions. We continue to favour the logistics sector in the region. Looking forward we believe that professionally managed rental apartments present an interesting opportunity to consider in several Asia Pacific countries. With the exception of Japan, the apartment sector is not institutionalised in most parts of the region and it could be attractive to offer better amenities for residents and enable them to work from home in a better environment.

Jacques Gordon, Global Head of Research & Strategy at LaSalle Investment Management said, “The COVID-19 crisis and the ensuing global recession emphasize important lessons about portfolio construction. Property types respond very differently to global macro events, and their financial characteristics are affected by interest rate regimes, pandemics, or technology trends, which don’t respect national borders. This means that the performance of the principal property types is more dispersed than we have ever seen. During the cap rate compression era, all the main property types tended to converge in terms of performance. Now, in this downturn, the different risk-return characteristics of each property type come to the fore.

We believe that the key to making good investment decisions during a period of radical uncertainty is to avoid letting “recency bias” control your thought process. In other words, looking through and ahead of a crisis, like the current pandemic, will be important in order to survive and thrive. We believe all investors and indeed, societies-at-large, face the challenge to look beyond the darkest hour. Real estate, because it serves all industries and all segments of society, must pay especially close attention to the difference between temporary and permanent changes”.

Elysia Tse, Head of Research & Strategy for Asia Pacific at LaSalle Investment Management said, “Throughout the pandemic, real estate capital markets in Asia Pacific have generally been stable. Most investors are taking a wait-and-see view on new investments and focusing on existing portfolios. We have not seen substantial pricing discounts in Asia Pacific, despite the fact that we are in the worst recession of decades.

The biggest unknown lies in the outlook for property cash flows and Net Operating Income (NOI). If resurgences of infections get much worse than today or last much longer than anticipated, NOI could deteriorate further than anticipated—pricing movements could be partly driven by anticipation. Furthermore, the increase in capital market volatility is expected to drive flight-to-safety, keeping cap rates of core assets low. This trend is projected to widen the pricing differences between assets with secured cash flows and those without them. LaSalle’s logistics sector strategy in Asia Pacific has worked out well for us going into this pandemic. The logistics sector, although not immune to the impact of the COVID-19 pandemic, has been a relative winner of this global demand shock. In sum, the COVID-19 pandemic presents risks, but also potential opportunities in Asia Pacific, as investment managers play the arbitrage between the “haves” and the “have nots”.

About LaSalle Investment Management 

LaSalle Investment Management is one of the world’s leading real estate investment managers. On a global basis, we manage approximately $77 billion of assets in private equity, debt and public real estate investments as of Q4 2021. The firm sponsors a complete range of investment vehicles including open- and closed-end funds, separate accounts and indirect investments. Our diverse client base includes public and private pension funds, insurance companies, governments, corporations, endowments and private individuals from across the globe. For more information please visit www.lasalle.com and LinkedIn.

NOTE: This information discussed above is based on the market analysis and expectations of LaSalle and should not be relied upon by the reader as research or investment advice regarding LaSalle funds or any issuer or security in particular. The information presented herein is for illustrative and educational purposes and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy in any jurisdiction where prohibited by law or where contrary to local law or regulation. Any such offer to invest, if made, will only be made to certain qualified investors by means of a private placement memorandum or applicable offering document and in accordance with applicable laws and regulations. Past performance is not indicative of future results, nor should any statements herein be construed as a prediction or guarantee of future results.