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Asia Pacific’s real estate returns in a multi-currency landscape

On a three-year time horizon, JLL forecasts the highest annual total returns denominated in local currency to come from Singapore (12% p.a.), followed by Tier 1 cities in China and India.

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Commercial real estate markets in Asia Pacific delivered strong total returns for investors in recent years.

Average annual returns in ten major office markets in the region ranged between 5% and 20% per year during the 2016-2018 period, as compared with low single-digit returns in New York City and London for the same period.

Nevertheless, currency movements are also an important consideration for inter-regional investors diversifying into Asia Pacific real estate markets.

Given the multi-currency landscape, pan-regional real estate investment vehicles in Asia Pacific often carry a higher degree of currency volatility risk compared to peers in the Eurozone and United States.

Comparing property market returns in local currency against foreign currency-adjusted returns (for foreign investors with no hedging) shows just how different the unhedged performance would have looked to investors in different parts of the world.

Table 1 demonstrates the effects of foreign exchange (FX) gains and losses on average annual total returns between 2016-2018 for investors from different countries.

We calculated total returns for prime Grade A office markets in 21 global cities (ten in Asia Pacific, five in Europe and six in United States) in eight key currencies – US dollar, Euro, British pound, Australian dollar, Singapore dollar, Japanese yen, Chinese yuan and South Korean won.

For total returns denominated in local currency, real estate investors investing locally received positive total returns in all major markets during 2016-2018. The data also shows that prime office markets in Asia Pacific delivered stronger total returns than London and all cities in United States. Hong Kong, Sydney and Melbourne have delivered the highest total returns in the region.

Sydney, Melbourne and some European capital cities delivered the highest currency-adjusted total returns for US dollar and Euro investors during the 2016-2018 period. In keeping with currency depreciation, Pound investors (those already invested in the market) achieved slightly higher returns in most overseas markets during the 2016-2018 period. On the other hand, international investors buying real estate in the United Kingdom three years ago may have recorded losses on paper.

Table 1: Historical annual average returns in 21 office markets from 2016-2018Source: JLL Research, Oxford Economics, 1Q 2019
Notes: Returns for non-leveraged investors with no currency hedging.
Historical returns for all markets are based on yields and capital values calculated by JLL
in order to provide a consistent methodology/universe in data for international comparisons.

Outlook for cross-border investors in offices

JLL expects total returns in most Asia Pacific real estate markets to remain attractive to international investors in the next three years.

On a three-year time horizon, JLL forecasts the highest annual total returns denominated in local currency to come from Singapore (12% p.a.), followed by Tier 1 cities in China and India…

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