While Asia-Pacific real estate has been resilient, an improving environment in the US may produce a generational opportunity for real estate investors and drive an increase in JARA’s net asset value.
The onset of inflation and rising interest rates towards the end of 2022 dramatically changed the landscape for real estate assets. The J.P. Morgan Global Core Real Assets Limited (JARA), which invests across infrastructure, transportation and real estate assets, reduced its overweight position in private real estate in the first half of 2023. While JARA may continue to rebalance, the portfolio managers believe a real estate recovery may be on the horizon and that US real estate, in particular, could boost net asset value (NAV) performance.
A once-in-a-generation opportunity in the US
Interest rates are unlikely to come down as quickly as expected in the US, thanks to stronger-than-expected economic growth and a tight labour market. A higher-for-longer interest rate environment might not sound positive for real estate investments, which tend to do better when interest rates are lower. However, the stronger economy has brought more lenders back to the market and increased liquidity, which is boosting activity in the real estate market.
In the US, overall volumes are still muted, but investor activity suggests that the long-awaited US recovery may be close. The real estate investment trust (REIT) market shows signs of bottoming and private market values are likely to follow. Expected returns are now at highest level since 2009. The fundamentals for US real estate look strong, particularly outside of the office market. Little new development in the last couple of years, shrinking pipelines and depressed capital values are setting the stage for a once-in-a-generation buying opportunity in real estate.
Strong retail sales growth is helping to support the US retail sector. In line with consumer trends, experience-based retail, such as restaurants, is increasing and driving demand for space in high quality shopping malls. The impact of online retail on brick-and-mortar stores is evolving; retailers are starting to use physical locations as showrooms and 42% of online sales now pass through stores1.
The challenges of the US office sector market are well known but it’s important to keep perspective: the bottom 10% of assets account for 60% of vacancies2. The best 40% have little or no vacancy—and this is where vast majority of JARA assets sit. Modern, well-located buildings with high-quality amenities continue to do well.
APAC has remained resilient
Across APAC region, GDP growth remains strong and higher than rest of the world. Monetary policies within Asia are varied though many countries are expected to cut rates later this year and into next year. Fundamentals are sound across most markets, and many have occupancy rates of well over 95%3.
Growing middle class consumption across Asia is a key theme that is reflected in the portfolio, particularly through the logistics sector as ecommerce sales continue to grow quickly in several markets, including Japan.
The residential sector across APAC is benefiting from increasing demand and tight supply, driven in part by smaller household sizes and an increasingly unaffordable supply. Japan has roughly 95-98% occupancy rates in four key cities and positive rent growth momentum3. While Japan has always had a strong multi-family sector, investors across APAC are pivoting to multi-family exposure over the last five years, doubling total transaction volume between 2019 and 2023. In Australia we see four attractive residential subsectors: student housing, senior housing, manufactured housing/land lease and buy-to-rent.
In China, the housing sector remains challenged while industrial logistics looks attractive due to the rising middle class. While China can be used as a diversifier, JARA’s portfolio managers are de-emphasizing the country compared to a few years ago, grouping it in a market with Hong Kong and Taiwan, despite some notable differences. JARA’s allocation to China is less than 10%.
Building a diversified portfolio
Increasingly investors are looking beyond the four main real estate sectors: office, industrial, residential and retail. JARA focuses on extended sectors that consider major themes around how the world lives, consumes and works.
Considering these themes has led to residential exposure that includes family rental property, suburban multi-family assets across the US Sun Belt and residences for active adults. Evolving consumption patterns are increasing the demand for immediate deliveries that require last-mile logistics. Consumers are also demanding local healthcare and recreation facilities.
Workers increasingly want flexibility, including some ability to work from home; they also are more willing to go into offices in attractive locations with lots of amenities, such as gyms and cafes. The portfolio also has exposure to the life sciences sector, which is seeing increased demand as technology evolves and is not impacted by working from home.
JARA takes a diversified approach to the real estate portion of the portfolio. Private real estate equity in the US and Asia-Pacific (APAC) regions is the core of the portfolio; private mezzanine debt exposure offers attractive income yield with mostly floating loans that provide protection from rising interest rates; listed real estate investment trusts (REITs) have a higher rating and more extensive use of leverage, making them important investment tool. Combined with infrastructure and transportation assets, JARA offers investors diversified global core real asset exposure in one portfolio4.