M&G Real Estate Points to APAC Beds and Sheds as Interest Rates Stay High

As investors continue to grapple with inflation, M&G Real Estate is redoubling its commitment to logistics and rental residential opportunities in Asia Pacific to generate strong and stable returns, its regional research head told Mingtiandi.

Asia Pacific real estate remains an attractive investment opportunity and provides global investors seeking shelter from high interest rates with an opportunity to diversify their portfolios, M&G’s research head for the region, Regina Lim said in an interview on Tuesday.

“There has been a shift globally towards better diversification of portfolios so people are trying to buy assets that they don’t have enough of, like logistics… The other sector that we also feel very excited about is residential,” she added.

Lim noted that logistics has been a primary beneficiary of the rise of e-commerce and the relocation of supply chains away from China, while rental housing delivered stable returns during the pandemic. The London headquartered firm notes that both sectors offer strong income and potential for rental growth.

Shed Supremacy

Lim said global inflation may have reached its peak in the fourth quarter, although it will likely remain elevated over the next five years, with central banks seen keeping monetary policy tight for longer than earlier anticipated. Ten-year bond yields may have already peaked after reaching the highest level seen in a decade, she said.

Uncertainties regarding interest rates and ongoing market volatility have kept investors on the sidelines, she added, helping to drive down trades of real estate in Asia Pacific by nearly 40 percent in the first quarter from a year ago, based on data from the MSCI Real Assets.

To achieve returns for investors, Lim said the London-based fund manager continues to look for opportunities to acquire mispriced quality assets in good locations, and will consider asset divestments if bids offer good risk-reward ratio.

“We (at M&G) still want to invest a lot in logistics and residential so you’ll see us doing more and more of that over time,” she said. “Over the medium term, we would have just as much logistics assets as office assets in our portfolios globally,” Lim added, while declining to disclose the current asset mix in the firm’s funds.

Relocation of supply chains away from China has spurred warehouse demand elsewhere in other Asian markets, including Japan, South Korea and India, while e-commerce continues to provide attractive growth opportunities in markets with many markets in the region yet to have achieved high levels of penetration for online shopping.

Among M&G’s major logistics deals in the region this year was its purchase of four car showrooms in Singapore from auto distributor Jardine Cycle & Carriage (JC&C) in a deal which closed in February. The properties changed hands through sale-and-leaseback arrangements worth S$333 million (then $248 million), marking the city-state’s largest industrial deal in nearly four years.

In January, the fund manager’s Asia core property strategy acquired an additional one-third interest in the ESR Ichikawa Distribution Centre in Japan’s Chiba prefecture for JPY 34 billion (then $267 million).

Bed Heads

In rental residential, Lim said increasing competition for talent among countries in the region is driving long-term demand for institutional grade rental homes, with Japan offering a safe haven for investors in Asia Pacific thanks to its mature multifamily sector and developed financial markets.

Australia and South Korea are also gaining favour as rental housing investment destinations as the two countries provide opportunities in student accommodation as Seoul, Sydney, Melbourne and other cities attract more international students.

Institutional rental housing is also expected to gain traction across the region as housing affordability continues to be a challenge for many countries.

“Over time, I think the quality and scale of institutional multifamily and build to rent developments will grow (in APAC) and that will make it a very large and scalable investment class for investors like us,” she added.

M&G in April of last year made its debut deal in Australia’s multifamily sector with a A$450 million (then $336.8 million) commitment to a build-to-core partnership with local developer Novus. That deal was made on behalf of M&G’s core Asia Property Fund which has initially focused on Japan for its multifamily exposure.

For office real estate, Lim said the sector remains a core part of their portfolio while acknowledging a “cyclical slowdown” in the segment, due to sluggish economic growth and an uncertain environment for businesses.

In looking for office opportunities M&G prioritises high quality, sustainable buildings in central locations, Lim said.