Reallocating Asia Smart Move Real Estate Investors
Following two years of consecutive losses, global real estate returns have finally turned positive in the second quarter of 2024, giving hope for a potential recovery. This comes after a period of soaring real estate values due to low interest rates, with global total returns reaching 5.0% in the fourth quarter of 2021 and 17.8% in the first quarter of 2022, well above long-term averages.
However, as interest rates began to rise, values declined, bringing them back to 2018 levels globally. While this correction is almost complete, it presents a great opportunity for investors to consider adding real estate to their portfolios. Historically, real estate has provided stable income returns and diversification benefits, and can also offer strong returns during recovery periods. For example, after the early 90s recession, investors saw a cumulative return of 76% over the next five years.
In the second quarter of 2024, global real estate values saw a moderate decline of 0.74%, the lowest quarterly adjustment in two years. This was offset by income returns of 1.07%, resulting in a positive return of 0.33%, the first positive quarter since the second quarter of 2022. The majority of global markets included in the MSCI Global Property Index saw write-ups in real estate values for the first time since the second quarter of 2022. Japan, South Korea, Singapore, Southern Europe, the Nordics, the Netherlands, France, and the UK all experienced value increases, while six markets saw smaller value losses compared to the previous quarter.
While Australia recorded a larger write-down in the second quarter, it was still an improvement from the first quarter, bringing valuations closer to those of other global markets. However, changes in capital values are just one component of real estate returns, with income returns often playing a larger role. This highlights the need for investors to consider both capital and income aspects when evaluating real estate investments.
When looking at total returns, which combine capital and income returns, 12 out of 15 countries in the MSCI Global Property Index saw positive returns in the second quarter. The US and Ireland saw flat or slightly negative returns, while Australia saw a significant decline due to ongoing property crisis and government interventions. However, preliminary data from the NCREIF ODCE index showed a positive trend in US total returns.
Looking at the Asia Pacific region, while there are signs of potential rebound in real estate investment globally, China and Japan may face challenges. These two countries accounted for a significant portion of cross-border inflows in the region in the third quarter of 2024. With China facing a property crisis and a decline in demand from the West, and Japan experiencing a hike in interest rates, these markets may see limited capital inflows in the near future. However, opportunities still exist in niche sectors such as senior housing in Japan and purpose-built student accommodation (PBSA) in Australia, which has a significant housing shortage for students.
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Overall, global real estate market is showing signs of stabilization, with valuations and transaction market pricing both indicating that the market is near its bottom. To see a further increase in market pricing and valuations, a decline in interest rates and strengthening property fundamentals is needed. With supply headwinds waning and positive demand in some markets, occupancies and rents are expected to increase, leading to a rise in property values. While not all markets and property types will perform equally well, private real estate offers low correlations to other asset classes, stable income returns, and a hedge against inflation. It may be an opportune time for investors to consider rebalancing their portfolios with private real estate.