Asia property deals tipped for record high

Cross-border flows have become a bigger driver of Asian real estate investment volume, with Singapore displacing China as the region's biggest exporter of capital into property.
Asia property deals tipped for record high

Property deal volume in Asia is set to hit an all-time high this year, said Graham Mackie, chairman of the investor advisory board of the Asian Association for Investors in Non-Listed Real Estate Vehicles (Anrev). but he did not provide a figure.

Commercial real estate transaction volumes in Asia Pacific hit a record $126.8 billion last year, surpassing the previous high of $120.5 billion in 2007, according to real estate services firm Jones Lang LaSalle.

Growth is being driven partly by cross-border investors from within and outside Asia, who are more interested in real estate in the region than they were a year or two ago, said Simon Mallinson, London-based managing director at Real Capital Analytics (RCA), at Anrev’s conference this week. (Most real estate investment in Asia is done domestically.)

Capital flowing from Singapore into Chinese property grew 447% to $7.4 billion in the year to October and from the Lion City to Australia it rose 110% to $2.7 billion over the same period, according to RCA. The biggest percentage increase in cross-border flows was from Singapore to India, which rose 930% to $878 million (see figure 1).

As a result, this year has seen Singapore displace China as the region's biggest exporter of capital into Asia's real estate markets.

Figure 1

Investment will grow further as the gap between real estate capitalisation (cap) rates in the West and Asia narrows, said Christina Gaw, managing principal of Hong Kong-based private equity real estate firm Gaw Capital Partners, the second biggest investor in Asian property by value this year, according to RCA (see figure 2).

“Core Asia will come into play over the next two years," she told AsianInvestor. “When the [developed] market norm [for real estate cap rates] goes below 5%, then Asia core gets more interesting."

Average core property cap rates in Asia (ex-Australia) range from 3.5% to 4%, said Gaw. But London office cap rates, for example, have declined below 5% over the past 18 months said Paul Dittmann, M&G Investments' head of senior commercial mortgages.

Core real estate refers to fully stabilised assets, such as office buildings, that produce consistent cash flows guaranteed by long-term contracts.

Yields have compressed in the US and the UK and there is potential for them to start compressing in Europe, agreed Anrev's Mackie, who is also Asia head of the global multi-manager property arm of UBS Global Asset Management. “That may lead to capital flowing back to Asia.”

Another factor driving investment in Asian property is that institutions in the region are becoming more familiar with opportunistic residential assets, said Gaw.
Figure 2

Gaw's Gateway Real Estate Fund IV, which closed in October 2013 at $1 billion, is now more than 60% invested, and the firm will look at raising Fund V next year.

The Australian and Japanese property markets have been the two primary recipients of capital in the past year, noted Mackie. They are attractive because of the yield premium earned above the cost of funding, he said. For example, the cost of funding in Japan is less than 1%, while the average cap rate in Tokyo is around 4%, he said.

Anrev released a real estate investment survey at the start of the year that showed fund managers’ preferred Asia-Pacific property markets for 2014. Australia (chosen by 63% of respondents) came top, followed by Greater China (61%) and Japan (54%).

Figures for the first nine months show the most popular markets have been Australia followed by Japan and then Greater China, said Mallinson.

John Saunders, BlackRock's head of Asian real estate, confirmed his division is active in Australian and Japan property, and said “China is now the most interesting I've seen it”.

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