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Asia Pacific
As of July 31, 2010
We would like to share with you our review and outlook for the Asia Pacific real estate market as of July 31, 2010. For the month, the FTSE EPRA/NAREIT Developed Asia Real Estate Indexhad a total return of+8.0% (net of dividend withholding taxes), as measured in U.S. dollars. Year to date, the index had a total return of –0.4%. By comparison, U.S. REITs, as measured by the FTSE NAREIT Equity REIT Index, had a total return of +9.5% for July and +15.6% for the year to date.
INVESTMENT REVIEW
Asia Pacific real estate securities generated strong performance in July as some of the risk factors that contributed to the steep decline in the second quarter lessened.
Hong Kong property stocks (which had a total return of +8.6% for
the month) 1extended a rally that began in June with the completion of a successful land auction that sought to ease an overheated housing market. Residential developers were the chief beneficiaries. July saw another successful auction—a luxury residential parcel—which sold at a premium to the market consensus.The government announced three additional land sales in August, bringing the total number of transactions to eight so far this year.
Hong Kong developers also benefited from a rebound in China’s real estate securities. Within the office sector, fundamentals continued to strengthen; grade-A office rents rose 8% in the second quarter with improved occupancy rates across the sector.
Australia property company (+1.0%) underperformance was driven by a rotation out of real estate securities following a compromise between the Labor government and mining industry on the proposed resource super profit tax. Investors in Australia’s resource-heavy securities market had favored real estate stocks for their perceived defensive qualities during the market turbulence that occurred in the aftermath of the proposed tax increase.
In Japan (+2.0%), real estate securities surged in the first half of the month but gave up ground in the last week with the release of lackluster earnings. J-REITs were solid outperformers as investors were attracted to their relative high yields after the yield on 10-year government bonds fell to 1.07%. Office company stocks remained weak as tenants are continuing to request rent reductions.
Singapore (+9.0%), the region’s top-performing developed market, was led by large capitalization developers, which had lagged other property types. Demand for office space in the second quarter rose to its highest level since third quarter 2007.
INVESTMENT OUTLOOK
In Hong Kong, we expect improvements in labor markets and increasing tourism to continue benefiting the retail sector. The strength of Hong Kong’s luxury residential market has raised concerns over housing affordability. We believe that tighter loan-to-value restrictions and increased land allocation should ease the situation.
The Japanese property market remains weak, as tenants continue to seek rent and space reductions. There are some positive signs, however. The residential market is improving now that affordability has improved, and grade-A office leasing activity is picking up as opportunistic tenants seek to upgrade at attractive rental rates. Still, fundamentals remain weak, and we retain a cautious view. A more robust recovery in office demand is still 12 to 24 months away.
Australia’s central bank kept interest rates unchanged at 4.5%, in line with consensus forecasts. We continue to have a positive view of property fundamentals, especially in the office sector, where valuations continue to rise. Industrial fundamentals have significantly improved in Sydney and Melbourne, but that has not been the case for secondary locations. Retail fundamentals have been softer than expected; there is still a significant amount of discounting at large anchor stores, but occupancies remain at 99%.
A recovery in Singapore’s exports and domestic demand should bode well for continued economic growth in 2010. We are taking a more positive view on sectors driven by a recovery in external demand. These property types include office, where rents are increasing, occupancy levels have been resilient and new demand is accelerating. Hotel fundamentals are also encouraging, with visitor arrivals picking up.
There may be interesting opportunities in the industrial sector. Similar to the office sector in 2009, industrial properties face stable (and even improving, in certain places) fundamentals amid supportive macroeconomic data. Industrial properties may see healthy near-term growth as landlords strike a balance between rental growth and occupancy stability. The ability to make acquisitions at favorable prices is crucial.
1 Country returns are in local currencies as measured by the FTSE EPRA/NAREIT Developed Asia Real Estate Index.
Past performance is no guarantee of future results.
The performance information in the preceding commentary does not reflect the performance of any Cohen & Steers Fund. Fund performance information is available through the link or links below.
Cohen & Steers Asia Pacific Realty Shares Performance
Please consider the investment objectives, risks, charges and expenses of any Cohen & Steers fund carefully before investing. A prospectus containing this and other information can be viewed by clicking here or may be obtained by calling 800-330-7348. Please read the prospectus carefully before investing. Cohen & Steers open-end funds are distributed by Cohen & Steers Securities, LLC.
The views and opinions in the preceding commentary are as of the date of publication and are subject to change. This material should not be relied upon as investment advice, does not constitute a recommendation to buy or sell a security or other investment and is not intended to predict or depict performance of any investment.
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