The Asia-Pacific region’s importance to the global commercial real estate market continues to grow, not just as a source of capital for investment elsewhere but as an investment market in its own right.

Commercial real estate transaction volumes in the region reached a new quarterly record of $42 billion in the third quarter, bringing year-to-date activity to a new high also of $128 billion, real estate broker JLL’s latest Global Capital Flows report shows

“While more accommodative interest rate policy has certainly boosted sentiment, particularly in the US, the broader global outperformance in [the third quarter] was driven by the continued strength of the Asia-Pacific market as well as mega-deal activity in the US,” Pranav Sethuraman, global research analyst at JLL, told AsianInvestor.

Asia-Pacific transaction volumes for the three months to September-end were up 18% year-on-year, JLL said. It was also a double-digit improvement for the nine-month period.

Nicholas Wilson

“Transaction volumes in Asia Pacific so far are up 10% year-on-year, so we expect a continuation of the current trend. [The fourth quarter] last year was also a fairly modest final quarter so given the pipeline and the fact we’re already up 10% it shouldn’t be hard to achieve,” said Nicholas Wilson, director of capital markets research for JLL Asia Pacific.

Global transaction volume growth was just 1%, with Europe and the rest of its time zone seeing a 13% drop. As a result of this, the Asia-Pacific share of the global market is now more than 23%, based on JLL's figures.

On a city by city basis, Seoul is the most liquid market so far in 2019 with $15.4 billion worth of real estate transacted in the first nine months, JLL noted, with Tokyo, Shanghai and Singapore not far behind. Of the 10 most liquid markets globally for the first three quarters of 2019, four of them were in Asia. 

Real estate yields – the annual rental income expressed as a percentage of a property’s total cost (or estimated current value) – also remain attractive in many cases relative to fixed income.

For instance, prime office yields are 3.55% in Singapore, 5.45% in Shanghai and 4.3% in Seoul.

Less attractive are Tokyo and Hong Kong with 2.6% and 2.66%, respectively. Both these markets are heavily dominated by local corporations and real estate firms with tightly held assets.

Singapore’s office real estate sector was one of the strongest in the world with transaction volumes rising by over 175% year-on-year due to strong rental growth and net absorption. Deal volumes in the city-state reached an all-time high, supported by Germany's Allianz Real Estate and Hong Kong asset manager Gaw Capital’s $1.15 billion acquisition of Duo Tower in July.

“Duo offers secure income yield with potential for positive rental reversion. This investment is well aligned with our preference towards sectors and assets that offer secure income yield and/or a growing income stream as well as increased cross-regional diversification,” Rushabh Desai, Asia-Pacific chief executive of Allianz Real Estate, told AsianInvestor in July.

Wilson said that although capital will continue to come from a diversified pool of investors, he saw a trend of more European insurance money, such as Allianz, making its way into Asian real estate.

CURRENCY HEDGING ISSUES

Although Asian investors are increasing making their presence felt globally, currency hedging is an issue when investing in the US real estate market. Because of the high cost of dollar hedging, it is hard to find value in markets with compressed yields.

For instance, prime office yields were 4% in New York and 4.6% in Los Angeles, according to JLL. Those yields are considered unattractive when hedging costs drive the net returns even lower.

European first-tier markets are also challenging places for Asian investors seeking suitable assets, with the prime office yields reaching 2.85% in Frankfurt and 3.5% in London in third quarter 2019. Instead, less sought-after sectors and markets are gaining traction.

“While it is true that yields are low in many core US and European markets, many Asian groups are increasingly looking at secondary markets where the yields are higher,” Sethuraman said.

Globally, industrial assets continue to be very sought after by investors of all nationalities as secular demand drivers, namely the growth of ecommerce, have helped to fuel investor appetite, Sethuraman said. He also pointed out that while currency hedging does bring a cost to some Asia-Pacific investors in the US, it does come with a positive carry for other groups in Europe.

An example of this is Korean capital. Spearheaded by Korean securities firms, Korean investors have pivoted away from the US and shifted their focus to Europe with an emphasis on Paris, Central and Eastern Europe and Nordic markets in 2019.

DEBT IN FAVOUR

With yields so compressed, some Asian investors are also turning towards real estate debt to eke out a better investment return.

“Regarding debt strategies, among Asian groups South Korean investors have been active in the real estate lending space, especially in the US, as groups continue to look for investment opportunities in the market,” Sethuraman said.

Providing an example of this trend is Korea’s Public Officials Benefit Association. In 2018, the public pension scheme launched separate 50/50 $400 million joint ventures with each of California State Teachers’ Retirement System (Calstrs) and Teacher Retirement System of Texas to invest in US real estate debt. 

In May 2019, Poba then doubled its $200 million investment with Calstrs. In October, it also expanded its partnership strategy into European real estate equity investments with Danish pension fund PFA.

Global fundraising for private closed-end real estate debt funds totalled $15.3 billion through the first three quarters of the year. There are 100 debt funds currently in the market, seeking an aggregate $36.2 billion, which is more than the volume raised in all of 2018. Over half of these funds have already held an interim close and have raised 65.2% of the total capital they are targeting, JLL’s report stated, highlighting the continued investor appetite for debt strategies.