Q. How has M&G’s appetite for the real estate sector in Asia evolved in the last 12 months?
In the last 12 months, uncertainties over inflation, interest rates and recessionary risks have affected real estate values globally. But as yields stabilise, M&G believes assets will reflect an attractive long-term value opportunity.
Investors’ appetite for real estate in Asia has increased, as the region’s performance clearly contrasts with that of Europe and the US. The prospects of creating the next best vintage of investments will improve after repricing.
Q. Which sectors does M&G favour in Asia and why?
Many parts of the market benefit from structural drivers supporting prospects for income and growth, giving investors inflation protection in the coming years.
We like the private residential rental sector in markets backed by positive demographic and immigration trends, continued affordability constraints and encouraging regulatory changes.
Modern logistics will do well as demand remains healthy, underpinned by new online shopping habits formed during the pandemic. Global manufacturing and supply chains are shifting as countries seek to improve resilience and diversification, and this would also provide a boost to certain logistics markets.
Q. Which Asia cities does M&G favour and why?
Each Asia Pacific market has different economic structures and unique market fundamentals. This gives us opportunities to diversify our exposure and tap into the value proposition offered by individual markets.
For example, Singapore is a gateway hub for Asia Pacific and Southeast Asia. Meanwhile, Australia is characterised by high population inflow and high levels of transparency. Japan is emerging from three decades of deflation and we expect the change in wage growth, inflation expectations and mindsets to drive sustained economic growth over the coming decade.
Q. What do you see as the biggest opportunities and concerns in Asia over the next year?
Opportunities
Private residential rental
Japan’s multi-family sector has remained resilient through the pandemic, with stable demand for inner-city living in cities such as Tokyo and Osaka driving the potential for further rental growth.
Australia’s build-to-rent market is positioned to mature over the medium term, backed by positive demographic fundamentals, high home prices in major cities and favourable regulatory changes.
Besides Japan and Australia, South Korea also looks interesting. Home prices in Seoul doubled between 2017 and 2021 but transactions and prices are correcting sharply due to rising interest rates. This could open up opportunities for investors to seed the growth of an institutional multi-family sector, potentially in partnerships with local developers.
Modern logistics
Markets with limited supply of modern industrial stock, such as Osaka and Fukuoka, could offer a resilient long- term investment opportunity. The reshoring of strategic production chains for resilience and diversification could benefit the logistics market in Japan, in addition to increased demand from the growing e-commerce sector.
Concerns
We are cautious on older offices in secondary locations. While working patterns is not a huge risk in most APAC markets, occupiers and investors are increasingly gravitating towards high‑quality prime assets in central locations. That could increase the risks of obsolescence and underperformance for secondary assets that typically lack green credentials and are in weaker locations.
Another area of concern would be South Korea’s logistics. The volume of incoming logistics facilities completed in 2023-24 could double the existing stock. As credit conditions have tightened sharply in South Korea, some developers may face refinancing issues. Asset valuations are now significantly lower than their underwriting as borrowing costs are much higher.
Assets in sub-markets with severe oversupply or poorer quality assets are likely to trade at higher yields. Investors will be able to demand increased risk premia and enter the market at an attractive price point.
Q. What returns does M&G anticipate making from real estate over the next year and the next five years?
This varies depending on the strategy and risk profile.
Q. What is M&G approach to ESG?
Responsible investing forms a huge part of M&G’s investment process. As a business, we have committed to carbon net zero by 2030 and as an asset owner and manager we are committed to managing carbon net zero investment portfolios by 2050.
We have had a dedicated Responsible Property Investment team in place for the last 15 years. In 2021, we achieved Green Star status for 10 funds in the Global Real Estate Sustainability Benchmark (GRESB) survey and retained our A rating in the Principles for Responsible Investment Real Estate.
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