After a years-long bull market, Asian property prices are at record highs and investors are questioning whether they are at last topping out.  And yet institutional allocations to regional real estate continue to rise and fundamentals remain robust; the sheer weight of demand for the asset class suggests any drop in valuations may not be major.

So says new research by consultancy PwC, Emerging Trends in Real Estate: Asia Pacific 2019, which is based on survey responses and interviews with individuals from property developers, real estate services firms, fund managers and asset owners.

“Across the region, upwardly spiralling prices, compressed cap rates [rates of return on property assets], and ominous macro and geopolitical indicators have fund managers and asset owners wondering whether the markets have finally peaked, and if so, how they should react,” said the report released yesterday.

Interviewees surveyed by PwC “voiced a consistently negative theme that markets were at or near a cyclical peak, with some … indicating they were looking to sell properties into the current strength”.

Some investors are also now considering how markets would look in the event of a downturn and eyeing the potential for distressed opportunities.

ALARM BELLS

Admittedly, worries over whether property prices are peaking have nagged investors in Asia for years, said the report, “but this time, the alarm bells are ringing louder than ever”.

Certain real estate markets that have been seen as expensive for some time, such as Hong Kong, are showing signs of a potential slowdown.

Overall property sales volumes in the Chinese territory fell 65.8% to HK$16.33 billion ($2.08 billion) in the three months to end-September from the previous quarter, and were around half those in the same period last year, according to a late-October report by property consultancy Cushman & Wakefield.

The total investment amount was the lowest recorded in the city in two years and was heavily impacted by a quarter-on-quarter drop of around 80% in office transaction volume. Concerns over a potential US-China trade war and rising interest rates were both seen as factors.

However, valuations in the city overall remain elevated – as do those in prime locations in Australia, New Zealand and Japan (see figure below).

WHICH ASIAN PROPERTY MARKETS ARE SEEN AS PEAKING? 
(Click for full view; Source: RICS)

And the indications are that there remains a huge weight of capital keen to access Asian property.  Real estate allocations are rising among asset owners and more investors than ever showing an interest in Asia Pacific property, according to the Cornell University and Hodes Weill 2018 Institutional Real Estate Allocations Monitor.

Meanwhile, research house Preqin said average institutional target property allocations stood at 10.4% in 2018, up from 30 basis points the year before and 150bp since 2013, and are tipped to rise further. Allocations that in the past were considered aggressive at 5% to 8% of AUM are now ‘de rigeur’, noted the PwC report.

RECORD FUNDRAISING

Real estate fundraising reflects this appetite, particularly from investors outside the region. The first quarter of 2018 was a record one in this regard: $9 billion of equity was raised across 13 funds for investment into Asia Pacific property, according to Preqin.

Managers raising pan-Asia funds say most of their investors are US pension funds and endowments, followed by Middle Eastern capital and European pensions and insurers, noted the PwC report.

And more products are proliferating, such as TH Real Estate’s Asia Pacific Cities Fund, which launched this month, while PGIM is readying an open-ended Asia property strategy of its own.

All this is adding to the pile of capital to be deployed in the region. According to Preqin, there is $34 billion of dry powder for property investment in Asia Pacific – admittedly still well below the $70 billion for Europe and $184 billion for North America.

More capital flows are expected from within Asia as well. Asset owners in Japan have typically largely shunned overseas real estate (see figure below), but that could now change. The country’s huge Government Pension Investment Fund in September issued its first global property mandate, and a wall of money is expected to follow from other Japanese institutions.

OUTBOUND ASIAN PROPERTY INVESTMENT
(Click for full view)

Nevertheless, signs of strain are starting to show. As liquidity falls and banks regionally begin to tighten lending terms, more stressed and distressed assets are beginning to appear in Asia Pacific, said the PwC report.

For some, a weakening of the market would be a welcome change, indicating something of a return to a normalised cycle and a greater availability of deals.

As one fund manager told PwC: “I wake up every morning saying, ‘Please let there be stress’, which is a nice way of saying we need to get some distress back in the market.”