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June 27, 2016

Highlights:

  • Any negative impact from Brexit will be mitigated by the fact that economic growth in the region is based largely on domestic demand. Asia Pacific still has high levels of capital ready for investment although investors are likely to require some clarity on Brexit before deploying the capital.
  • The latest round of currency volatility will have a big impact on real estate returns. In keeping with currency depreciation, it will be easier for Pound and Euro investors to achieve high returns in all Asia Pacific markets, particularly in Japan, Australia, China and Hong Kong.
  • A fall in the Pound against Asian currencies will provide an entry point into the UK for overseas investors.

Global financial markets were struck by Britain’s decision to leave European Union in the June 23 referendum. Initially, the Pound tumbled 10 percent against the U.S. dollar to a 30-year low of US$1.35. But it was the euro that slid the most – sinking to historic lows of US$1.1. On the other hand, the Japanese Yen surged to 100 Yen on the back of demands for perceived safe-haven investment.

Despite considerable uncertainty, there have been few immediate changes as the UK will stay in the EU while managing an orderly exit. Economically, Capital Economics expects “Brexit” to have no net gain or loss for the UK in the long term and the main impact on Asian economies will likely be through financial markets. In the case of continued market volatility, capital may start to flow out of some Emerging Asian countries and put pressure on their currencies.

Pound and Euro investors able to achieve high returns in Asia Pacific markets

What does it all mean for the region’s real estate investors?  This is an important question for investors diversifying into real estate outside their home markets, based on the combination of currencies and total returns from property.

JLL has calculated annual total returns ending 1Q16 for Prime/Grade A office markets in 10 Asia Pacific cities, as well as London and New York, in eight currencies – U.S. Dollar, Euro, Pound Sterling, Australian Dollar, Singapore Dollar, Japanese Yen, Renminbi and South Korean Won – using the 1Q16 average exchange rates and comparing them against the returns that investor would have received based on the exchange rates at Friday afternoon.

For returns denominated in local currency, real estate investors would have received positive returns in all 12 markets in Q1, with the exception of Singapore. JLL showed Asia Pacific office markets to deliver stronger total returns than London and New York – highest in Australia, Shanghai and Tokyo. Foreign investors will generally have the highest one year total return when placing his or her money in the Tokyo office market.

The latest round of currency volatility will have a big impact on real estate returns. In keeping with currency depreciation, Pound and Euro investors should be able to achieve high returns in all Asia Pacific markets, particularly in Japan, Australia, China and Hong Kong. For example, based on Friday’s exchange rate, for a British Pound investor who bought into the Tokyo office market a year ago, his return – once the round trip is made from Pound into the Japanese Yen real estate and then back into Pound – is a hefty 50 percent p.a., compared to 18 percent for a Japanese Yen denominated investor.

Given the relatively strong currency, Yen investors would have been best off investing locally; they faced currency exchange losses and had lower returns than the local property returns in all overseas markets.

Pre-Brexit:

One year holding period returns’ table for 1Q16 (as per 1Q average exchange rates)

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Source: JLL, 1Q16, Thomson Reuters

Post-Brexit:

One year holding period returns’ table for 1Q16 (as per exchange rates 24 June PM)

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Source: JLL, 1Q16, Thomson Reuters

Opportunities re-emerge in UK markets on back of weak Pound

The London property market will feel the effects of the ‘vote leave’ decision more deeply, as cross-border investors are the most active. Due to the depreciation of the Pound, foreign exchange losses may significantly decreased overseas investors’ returns. Paradoxically, investors may well identify opportunities in this market over the short-term, particularly international purchasers that can benefit from the currency arbitrage that has opened up by a weaker Pound Sterling.

Investor sentiment may become more subdued in the short term and it is possible that real estate investment deal flow may slow while this period of financial volatility continues. However, real estate markets should be one of the few asset classes to weather the unpredictability and continue to post rental and capital value growth in most markets this year.

One-year holding period return – London (1Q16, as per FX rates at 24 June PM)

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Source: JLL, 1Q16, Thomson Reuters

Click here to read more about the impact of Brexit on commercial real estate markets

Myles Huang, Local Research Director, Asia Pacific, JLL
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