Research reveals positive link between Asia listed and direct real estate returns

21 May 2014   Category: News, Asia, Australia, Global, Hong Kong, Japan, Singapore   By Derek Au

Listed real estate in Asia could be an attractive option for investors seeking exposure to direct real estate thanks to its liquidity and much lower transaction costs, research commissioned by the Asia Pacific Real Estate Association (APREA) shows.

The report, conducted by real estate analysis firm IPD, covered Australia, Japan, Hong Kong and Singapore. It focused on short-term linkage between returns achieved in listed and direct real estate between 1Q 2004 and 4Q 2012 in these four markets, which turned out to be a positive correlation.

Return correlation matrix – 1Q 2004 through 4Q 2012

APREA said these findings support the case for using the listed market to achieve some exposure to commercial property. The results are consistent with those from previous studies on the North American and European markets, and suggest that Asia is developing in a manner similar to those, APREA added.

On an unadjusted basis, the report said, listed market returns are more correlated with their international counterparts than they are with domestic direct market, partly due to the exposure of the listed sector to overseas direct assets. The report also said a possible explanation for Australia having the strongest relationship between the listed and direct markets is that its listed market is relatively domestically-focused and more mature, with high levels of transparency.

According to the report, other factors which potentially distort the relationship between listed returns and direct returns include the appraisal smoothing incorporated in direct indexes, but not in listed indexes and the inherent lag in the reporting of both direct market transactions and valuations. As a result, the research adjusted for these two factors and found that this made a substantial difference to the comparability of returns. The actual level of movement would be understated without making these adjustments, the report said.

Adjusted correlations – 1Q 2004 through 4Q 2012

Peter Hobbs, managing director and head of research at IPD, said: “We were glad to be able to replicate analysis that has been carried out in Europe and the US, and particularly interested to see a stronger relationship when we carried out the analysis for a ‘matched’ sample that controlled for the underlying property sample of a set of companies across the region.”