Press Release

Easy money in China, Japan bodes well for real estate investment

September 24, 2018 — Chicago

BT_20180924_LMXLASALLE_3570257.jpg

"EASY money" has wound up inflating asset prices, including property, in recent years so much that its imminent reversal - with many countries beginning to tighten monetary policy - will hit property investments hard.

Such is the conventional wisdom but this may not necessarily hold true, particularly, certain types of property investments, according to LaSalle Investment Management's (IM) Asia-Pacific head of research & strategy, Elysia Tse.

Firstly, macroeconomics is not the only factor that affects investment in commercial real estate, she said.

Secondly, LaSalle IM still sees investment opportunities, as not all countries are jumping on the monetary tightening bandwagon, citing China and Japan as examples.

In a recent interview with The Business Times, Ms Tse said real estate has proven to be a more stable asset class with less volatility in price fluctuation compared to stocks and bonds. This is because they are a longer-dated asset class rather than one that is traded on a daily or even by-minute basis.

"You have multi-year leases that are tied to income for real estate; that tends to be a lot more stable, and over the last few years, we are seeing institutional investors increasing their allocation to real estate in general, not just in Asia but globally."

More investors are also using real estate as a "shock absorber" to shield against capital market volatility in the fixed income and equity markets.

Ms Tse said the Bank of Japan's recent pledge to keep rates near 0 per cent for an extended period of time, and China's continued easing policy, are all good reasons to invest in real estate in these two major Asian economies.

"We are certainly in a trajectory of an extended period of a gradual interest rate increase environment, and what that means is that capital market driven appreciation is mostly behind us.

"What we are focusing on is creating stable income stream, real estate fundamentals, liquid and large markets, quality assets - so, back to basics, really focused on that asset-level brick-and-mortar for higher returns for investors."

On a micro level, capital appreciation is still possible by identifying undervalued assets and repositioning or redeveloping them, for instance, by changing the tenant mix of existing properties to enable them to command higher rental rates, she said.

In Japan, where near-zero 10-year Treasury bond yields have further boosted the appeal of real estate yield among domestic investors, LaSalle IM favours Grade-B offices in Tokyo, malls anchored by retail tenants dealing in everyday consumables, rental apartments in urban locations and logistics facilities.

In China, the investment firm likes logistics real estate, particularly in Tier-1 cities and their satellite cities, as well as offices in Shanghai. The satellite cities of Tier-1 markets include Kunshan and Changsu, because for the logistics sector, the distribution channel matters more than the actual facility location. The locations need not be prime, but do have to be accessible to transportation systems and be close to large population bases. Also, with assets in Tier-1 cities becoming more expensive, those in satellite cities make a good alternative, Ms Tse said.

Logistics in Asia-Pacific has been a hit with investors this year, backed by e-commerce as a demand driver and limited supply in selected logistics markets.

Ms Tse noted that most of the new supply in the region in the first half of 2018 was snapped up at a much faster pace than anticipated at projected rental levels. On top of that, capitalisation rates have continued to compress because of the strong investor interest, especially in LaSalle's key markets of Japan, China and South Korea.

Comparing yields, she noted that Tokyo Grade-B office yields are about 4 per cent.

In China, fully-leased, fully-occupied logistics centres in Tier-1 cities and their satellite cities can yield 5.25 per cent to 5.75 per cent.

A fully-leased prime Grade-A office building in Shanghai's central business district (CBD) yields about 3.5 per cent and about 3.75 per cent per cent in fringe CBD areas.

Logistics yields in Shanghai generate an additional spread of 150 to 175 basis points over office yields, which is attractive to investors, she added.

Economic fundamentals also fuel the appeal of real estate in these two countries, as China continues to prioritise its quality of growth over quantity and focus on financial market reform, which will likely lead to stable, long-term economic growth with occasional short-term volatility.

In Japan, the low unemployment rate, fiscal stimulus targeting lower-income households and anticipated tax cuts for corporations that offer wage increases are expected to boost retail sales and drive occupier demand for shopping centres.

As for trade fears, Ms Tse believes the ongoing, tit-for-tat Sino-US tariff war will have a limited impact on real estate investment in China and the rest of Asia-Pacific as most property transactions in Asia are primarily domestic transactions.

"It ranges by country, but domestic investors make up 60 per cent to 80 per cent of total real estate transaction volumes in the major Asia-Pacific countries. An additional 10-15 per cent of transaction volume comes from investors within the region.

"The strong real estate transaction volumes from domestic and intra-regional investors are partly because intra-regional trade - post-global financial crisis - has been a primary driver of the Asia-Pacific region's total trade, rather than trades with US and Europe. In other words, the economic connectivity among Asia-Pacific countries partly help to drive real estate investments within the region.

"From that perspective, we expect transaction volumes to remain solid, and that is evidenced by the first half of this year, where transaction volume saw a close to 30 per cent increase compared to the same period in 2017."

Singapore.jpg

As for Singapore, she said the local economy is in "a recovery mode", which feeds into the property sector.

"We are already seeing recovery in the office sector primarily in the CBD; same for the industrial sector. The retail sector, on the other hand, is facing some challenges given competition from e-commerce and suburban retail and neighbourhood centres.

"But even in the worst times, the occupancy rate still averages about 96 per cent, so retail malls are still a relatively stable asset class, although we may not be expecting very strong rental growth in the next two to three years."

Over this period, she projects stable occupancies for the industrial sector and the strongest rental growth to come from the office sector among the three major sectors.

However, she is "not bullish" on Singapore's office sector beyond 2021, partly due to the resultant volatility in occupancy and rentals from the short occupier market cycles of 3.5 years to six years, compared to around 10 years in the United States and United Kingdom.



About JLL Income Property Trust

Jones Lang LaSalle Income Property Trust, Inc. is a daily NAV REIT that owns and manages a diversified portfolio of high quality, income-producing apartment, industrial, office and retail properties located primarily in the United States. JLL Income Property Trust expects to further diversify its real estate portfolio over time, including on a global basis. For more information, visit www.jllipt.com. 

About LaSalle Investment Management

LaSalle Investment Management, Inc., a member of the JLL group and advisor to JLL Income Property Trust, is one of the world’s leading global real estate investment managers with nearly 700 employees in 17 countries worldwide and approximately $60 billion of assets under management of private and public property equity and debt investments. LaSalle’s diverse client base includes public and private pension funds, insurance companies, governments, endowments and private individuals from across the globe. For more information, visit www.lasalle.com. 

Forward Looking Statements

This press release may contain forward-looking statements with respect to JLL Income Property Trust. Forward-looking statements are statements that are not descriptions of historical facts and include statements regarding management’s intentions, beliefs, expectations, plans or predictions of the future. Because such statements include risks, uncertainties and contingencies, actual results may differ materially from those expressed or implied by such forward-looking statements. 

Summary of Risk Factors

You should read the prospectus carefully for a description of the risks associated with an investment in JLL Income Property Trust. Some of these risks include but are not limited to the following:

  • Since there is no public trading market for shares of our common  stock, repurchases of shares by us after a one-year minimum  holding period will likely be the only way to dispose of your  shares. After a required one-year holding period, JLLIPT limits the amount of shares that may be repurchased under our repurchase plan to approximately 5% of our net asset value (NAV) per quarter and 20% of our NAV per annum. Because our assets will consist primarily of properties that generally cannot be readily liquidated, JLLIPT may not have sufficient liquid resources to satisfy repurchase requests. Further, our board of directors may modify or suspend our repurchase plan if it deems such action to be in the best interest of our stockholders. As a result, our shares have limited liquidity and at times may be illiquid.
  • The purchase and redemption price for shares of our common stock will be based on the NAV of each class of common stock and will not be based on any public trading market. Because valuation of properties is inherently subjective, our NAV may not accurately reflect the actual price at which our assets could be liquidated on any given day.
    JLLIPT is dependent on our advisor to conduct our operations. JLLIPT will pay substantial fees to our advisor, which increases your risk of loss. JLLIPT has a history of operating losses and cannot assure you that JLLIPT will achieve profitability. Our advisor will face conflicts of interest as a result of, among other things, time constraints, allocation of investment opportunities, and the fact that the fees it will receive for services rendered to us will be based on our NAV, which it is responsible for   calculating.
  • The amount of distributions JLLIPT makes is uncertain and there is no assurance that future distributions will be made. JLLIPT may pay distributions from sources other than cash f low from operations, including, without limitation, the sale of assets, borrowings, or offering proceeds. Our use of leverage increases the risk of your investment. If JLLIPT fails to maintain our status as a REIT, and no relief provisions apply, JLLIPT would be subject to serious adverse tax consequences that would cause a significant reduction in our cash available for distribution to our stockholders and potentially have a negative impact on our NAV.
  • While JLLIPT’s investment strategy is to invest in stabilized commercial real estate properties diversified by sector with a focus on providing current income to investors, an investment in JLLIPT is not an investment in fixed income. Fixed income has material differences from an investment in a non-traded REIT, including those related to vehicle structure, investment objectives and restrictions, risks, fluctuation of principal, safety, guarantees or insurance, fees and expenses, liquidity and tax treatment.
  • Investing in commercial real estate assets involves certain risks, including but not limited to: tenants’ inability to pay rent; increases in interest rates and lack of availability of financing; tenant turnover and vacancies; and changes in supply of or demand for similar properties in a given market.
  • You should carefully review the “Risk Factors” section of our prospectus for a discussion of the risks and uncertainties that we believe are material to our business, operating results, prospects and financial condition. Except as otherwise required by federal securities laws, we do not undertake to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
  • This sales material must be read in conjunction with the prospectus in order to fully understand all the implications and risks of the offering of securities to which it relates. This sales material is neither an offer to sell nor a solicitation of an offer to buy securities. An offering is made only by the prospectus.
  • Investors could lose all or a substantial amount of their investment. Alternative investments are suitable only for eligible, long-term investors who are willing to forgo liquidity and put capital at risk for an indefinite period of time.
  • This material is not to be reproduced or distributed to any other persons (other than professional advisors of the investors or prospective investors, as applicable, receiving this material) and is intended solely for the use of the persons to whom it has been delivered. 

Forward-Looking Statement Disclosure

This literature contains forward-looking statements within the meaning of federal securities laws and regulations. These forward-looking statements are identified by their use of terms such as  “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,”  “intend,” “may,” “plan,” “predict,” “project,” “should,” “will,”  and other similar terms, including references to assumptions  and forecasts of future results. Forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties, and other factors that may cause the actual results to differ materially from those anticipated at the time the forward-looking statements are made. These risks, uncertainties, and contingencies include, but are not limited to, the following: our ability to effectively raise capital in our offering; uncertainties relating to changes in general economic and real estate conditions; uncertainties relating to the implementation of our investment strategy; and other risk factors as outlined in our prospectus and periodic reports filed with the Securities and Exchange Commission. Although JLLIPT believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, we can give no assurance that the expectations will be attained or that any deviation will not be material. JLLIPT undertakes no obligation to update any forward-looking statement contained herein to conform the statement to actual results or changes in our expectations.