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Essential IR Insights Newsletter - February 2023

In Asia-Pacific real estate, Australia outperforms YTD, while Hong Kong lags

Editor's note: All figuresare reported in U.S. dollars.

TheSNL Australia Real Estate index continues to have the highest total returnyear-to-date, with 7.88% as of May 2, exceeding the SNL Asia-Pacific RealEstate and the SNL Global Real Estate indexes by 5.11 percentage points and1.69 percentage points, respectively. While Singapore and Japan Real Estateindexes turned the year-to-date total return values from negative to positive,the SNL Hong Kong Real Estate index had the lowest total return of negative3.24%, a continuation of the downward trend the sector saw in 2015.

TheSNL Australia Real Estate index contains 34 companies, 76% of which postedpositive total returns year-to-date, making the index a top performer. Some ofthe Australian-based companies with high total returns year-to-date areAstro Japan PropertyTrust, with 24.70%; Carindale Property Trust, with 24.42%; and , with 18.57%.

Thecountry's stable economy, which still grows at over 2% GDP, plays a big part,according to Farina Parsons, an analyst of Asia-Pacific equity and creditresearch at Morningstar. "Obviously, REIT yield in Australia is generallymuch higher than other global trust companies, and it really comes down to theunderlying economy," she told S&P Global Market Intelligence.

Thestrong total returns could also imply high levels of asset value growth in someof the property companies, a trend driven by the weight of capital moving intoreal estate and yield compression. "The Asian demand, including that fromthe Chinese and Singaporeans, has been very high for Australian realestate," said Parsons. "Also, U.S. investors have been investingheavily into the sector, thus pushing cap rates to very low."

Whilecommercial REITs continue to be better performers among the Australian propertycompanies, some groups with residential exposure have benefited from strongproperty growth in South Wales and Victoria during the last 18 months,according to Parsons. Stockland, for example, it remains on track to achieveunderlying EPS growth of between 6.5% and 7.5% in the full year, afterrecording strong market conditions in these areas.

Onthe other hand, 36% of 68 companies based in Hong Kong posted negative totalreturns year-to-date.

Thesluggish performance of Hong Kong-listed property companies is not a surprise,as the market is awash with relatively negative sentiment amid concerns aroundChina's currency and economic growth. Since the yuan's sudden dropin August 2015, some mainland-focused developers, with revenues and assets inChina denominated in local currency, have reported profit declines in theyear-end 2015 earnings season primarily due to foreign exchange losses.

ForHong Kong-based developers and landlords, there are worries about profitmargins, as the local property market, has been showing signs of weakening amida rising supply of homes, higher interest rates expectations and slowing growthin China since the third quarter of 2015.

Homeprices have been on a sliding trajectory since peaking in September 2015. TheRating and Valuation Department's latest monthly supplement,released in April, showed that the general price index for private homeswas 272.8 in February, the lowest since October 2014. Home sales, on the otherhand, dropped 39% in the first quarter compared with the previous three months,to an all-time low of 6,221 units, accordingto Jones Lang LaSalle.

Theretail property sector, dragged down by the troubled tourism sector, is alsoexperiencing turbulence. Colliers Research predictsthat rents and capital values in prime Hong Kong shops will decline 10%and 24%, respectively, by the end of 2016.

Inaddition, other factors such as volatility in Chinese equity market havecontributed to cautious investor sentiment in China and Hong Kong, according toMizuho Securities' analyst Alan Jin. "There are a lot of reasons why HongKong-listed property companies are having a tough time in boosting totalreturns. But they all come down to the broader economic environment," Jintold S&P Global.

Althoughon the whole Hong Kong real estate companies struggle with total returnsyear-to-date, Hong Kong's AsianGrowth Properties Ltd. had the highest total return of 212.90% asof May 2.

Whilesmall-cap companies normally tend to generate higher returns, Asian GrowthProperties could have also benefited from a major transaction earlier thisyear. The SEA Holdings Ltd. subsidiary inked a deal in February to the 39-story Dah SingFinancial Centre in Hong Kong's Wan Chai to China Everbright Holdings Co. Ltd.for around HK$10 billion. Completionof the deal is expected to take place on or before May 24.

, adiversified real estate company from the Philippines, had the second-best totalreturn performance for the year through May 2, at 60.62%. Three more Hong Kongcompanies, New World China LandLtd., Shangri-La AsiaLtd. and Great EagleHoldings Ltd., appear in the top 10 total returns year-to-date.Indonesia-based SentulCity and Ciputra PropertyTbk; Australia-based Carindale Property Trust; and Japan-based make up the top 10 year-to-date total return chart.

AlthoughHong Kong has the top performing company in terms of total return year-to-date,another Hong Kong-based company, SRE Group Ltd., had the lowest total return, of negative34.25%. Four of the bottom 10 companies with the lowest total return came fromChina; two of these are ModernLand (China) Co. Ltd. and Sino-Ocean Land Holdings Ltd. with negative 31.82% andnegative 29.58% total returns year-to-date, respectively.

Year-to-datethrough May 2, the MSCI World Real Estate index outperformed the SNLAsia-Pacific Real Estate index by 2.84 percentage points.

Use SNL's Global Real Estate Total Return template to calculate total return changes over a user-defined time range for selected companies and benchmark indexes.

Other templates are available in SNL's Template Library.