Asia property returns face headwinds

Real estate investment volumes soared in the region in the first half of this year, as institutions continue to diversify portfolios. But there are short-term concerns to contend with.
Asia property returns face headwinds

A combination of high property prices, historical low yields and expectations of rising interest rates could prompt institutional investors to increasingly focus on high quality Asia Pacific real estate, after a period of rapid demand, predict property analysts.

Real estate consultancy JLL released a report on Monday (August 27) detailing that investment volumes in the region hit $81 billion in the first half of 2018, up 30% from a year ago. In addition, a report on Asia’s real estate market outlook by British fund house M&G released on Tuesday (August 28) predicted that regional property investments will deliver total returns of around 9% in 2018.

But the latter report also forecast that total returns would begin to dip from 2019 onwards, which will force investors to consider how best to adapt their approach.

“Factoring in five to 10 basis points of cap rate (yield) expansion on the back of interest rates in the region rising from 2019 could mean flat to negative cap values growth for select market-sectors over the near term,” the report noted.

“This places increasing importance on the stability and defensiveness of income from property, which can be strengthened using effective applied active asset management.”

In other words, it’s likely that institutional investors will focus on buying prime, institutional-grade assets that are relatively liquid and well-located, to ensure they are protected from any macro headwinds or market downturns, added Jonathan Hsu, M&G’s director of research.


Office buildings are typically regarded as among the most reliable real estate investments. And, according to JLL’s report, they were the most popular form of investment with institutional investors in the first half of 2018, absorbing half of all transaction volumes.

Second were retail property investments, which took 20%, while industrial and logistics made up 13% of transactions. However the latter jumped 27% from a year-ago, as foreign and domestic investors alike continue to invest money into it, the report said.

Institutional investors drove a great deal of the demand, particularly for deal sizes of $200 million or more, said Nick Wilson, director of capital market research at JLL Asia Pacific.

The ongoing interest of investors in Asia Pacific property was underscored earlier this month, when Singaporean state fund Government Investment Corporation (GIC) announced it was buying a 49% stake in Indian property developer Provenance Land, which is planning to build a mixed-use project in Mumbai comprising a luxury hotel, private residential units and an office tower.

The JLL report noted that regional investors remained the most active net buyers of global commercial real estate during the first half, Beijing having imposed restrictions on Chinese capital outflows. The latter has traditionally been one of the largest sources of cross-border real estate investments.

While Chinese investors took a step back, investors from Hong Kong, Singapore and South Korea were on hand to provide liquidity, the report said.

“The group [Asian investors] purchased 20% of office, hotel and retail assets disposed by global funds, who were the largest net sellers of commercial real estate – worth a total of $31.5 billion between January and June,” it noted.

Within Asia, Korea’s property market enjoyed a particular surge in interest from both global and Asian institutions, JLL's Wilson told AsianInvestor.


M&G’s report also singled out Korea’s logistics sector as being of particular appeal.

“Australia and Seoul are expected to be the best performing Apac logistics markets with average total returns of between 8% and 12% per annum over the next three years,” the report noted.

Demand for logistics is expected to remain robust as e-commerce continues to grow in the region, it said. It noted that investment activity in Asia Pacific property over the near term will likely centre on markets and sectors offering relatively higher yields, such as Australia and South Korea.

“The latter is expected to see more investment interest in the medium term, as geopolitical tensions in the Korean peninsula subside and investor confidence improves,” it said.

Belief in the potential of Korean e-commerce prompted global investors such as Canada Pension Plan Investment Board to team up with Hong Kong-based real estate developer ESR to invest up to $500 million in a new investment vehicle targeting modern logistics facilities in the country.

JLL’s Wilson said the country has a favourable combination of attractive yields and relatively low financing costs.

“Core office assets, for instance, yield 4% to 5%, while financing costs are below 4%. In many other markets, the spread between the cost of financing and yield is compressing; however, in markets such as Korea, the spread is fairly stable,” he said.


While investments over the medium term could face some tension, M&G predicted that increasing institutional interest in Asian real estate, especially core assets, should continue to support investments and increase liquidity in the region over the long term.

“The market may also attract a more diverse base of institutional investors looking to Apac real estate for its stable income over the long term, rather than solely for its capital value growth,” it noted.

Indeed, large institutional investors such as Canadian pension plans have started allocating up to 20% of their portfolios to real assets (which comprises real estate, infrastructure and transport) alongside more traditional investments into equity and fixed income.

“They get a stable stream of income that is less volatile than traditional fixed income, while benefitting from the capital appreciation and inflation-protecting qualities of equity as well,” Robert Johnson, a senior member of the portfolio management team for Asia Pacific real estate at JP Morgan Asset Management, told AsianInvestor.

In recent months, several regional institutions have voiced a desire to invest in real estate, including Japan’s Dai-ichi Life Insurance and Korea Teachers Credit Union.

China Life, the country's biggest lifer by assets, also said last week that it plans to raise exposure to real estate assets.

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