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Asian commercial property set for historic investment highs

CBRE’s Greg Hyland, head of capital markets in Asia Pacific, and Dr Henry Chin, global head of investor thought leadership and regional head of research, expect significant inflows into commercial real estate in the region, enabling it to continue to roar in the Year of the Tiger.
Asian commercial property set for historic investment highs

As many markets across Asia usher in the lunar new year, the Year of the Tiger is set to see a few speedbumps throughout the course of 2022. Some of the many risks facing investors include the possibility of another Covid-19 variant along with intense competition pushing up capital values in a market flush with liquidity.

But as the Chinese saying goes, “不入虎穴,焉得虎子”, or “you can’t catch a tiger if you don’t venture into its den”, investors are recognising opportunities in Asian commercial real estate amid the unpredictability.

The sector looks set for a banner year for investment as many governments shift to live with an endemic state of Covid-19, and property investors prepare to invest more capital in the sector.

Historic highs for Asia Pacific commercial real estate investment

According to CBRE’s 2022 Asia Pacific Investor Intentions Survey, sentiment towards regional commercial real estate remains positive, with around 60% of investors planning to purchase more this year compared with 2021.

The upbeat overall mood has led CBRE to forecast that total investment turnover will increase by 5% to 10%, to around $150 billion in 2022. Should this be achieved, it will be a historical high for annual commercial real estate transaction volume in the Asia Pacific region.

The 535 survey respondents, who range from institutional to private investors, said they are seeking value-added opportunities, which involves upgrading or redeveloping existing properties in good locations to meet future ESG standards, as well as re-positioning under-utilised facilities to cater to faster-growing markets. 

Tokyo, Shanghai and Singapore are the most favoured cities for cross-border investment, while logistics and offices topped the list of preferred sub-sectors (Figure 1). Factors including the availability of low-cost financing, prolonged low interest rates, high liquidity and a large volume of multi-family assets ensured Tokyo retained its status as the most popular city for investment for a third consecutive year.

Singapore remains a major destination for cross-border investors, including those from Japan, Taiwan and beyond Asia Pacific. Meanwhile, increasing investor interest saw Beijing and Shanghai break into this year’s top five preferred investment destinations. Both markets continue to attract a considerable volume of Asian capital, particularly from Singapore and Hong Kong.

Figure 1: Top ten preferred cities for cross-border investment

Source: Asia Pacific Investor Intentions Survey 2022, CBRE Research

Sources of demand

While higher interest rates will crimp demand for real estate in some quarters, this is offset by the scarcity of assets such as modern logistics facilities and Grade A office spaces in Asia Pacific. Indeed, property has historically been one of the best hedges in times of rising inflation.

Strong investment activity from close-ended real estate funds, real estate investment trusts (REITs) and institutional investors – including many that paused acquisitions at the onset of Covid-19 in 2020 – are expected to drive the recovery in demand. CBRE estimates that institutions in the region have up to $500 billion in equity on their balance sheets awaiting deployment.

International investors are keen to increase their exposure to Asian real estate to capture the region’s growth and diversify their portfolio. Within the region, investors from Singapore, Australia and South Korea are the ones most keen on outward investments.

As for mainland China, there continues to be strong demand for commercial property especially among insurers, even as investors have become increasingly concerned about residential developers.

Logistics and office sectors lead the way

CBRE found that while logistic assets remain the most popular sub-sector for property investors, interest has softened from the 2021 survey due to rising capital values. Moreover, Asia Pacific logistic rents have risen by 33% since 2010, limiting the potential for further increases in the next few years (Figure 2).

Figure 2: Preferred investment sector in 2022

Source: Asia Pacific Investor Intentions Survey, CBRE Research, December 2021

In contrast, the appetite for offices has strengthened over the past year, with “flight-to-quality” relocations and demand for space in newer, greener buildings expected to help the region’s office market recover from its longest downward rental cycle in 20 years.

Many offices in Asia Pacific have reopened or are in the process of welcoming returning employees. While the Omicron variant has slowed the reopening process, it is unlikely to derail the recovery of office demand as companies gain more confidence about returning to the office.

Initial reactions from North Asian companies indicate that most will continue working at the office, albeit with limits on occupancy or team rotation.

For the whole of 2022, CBRE expects Grade A office rents to increase by around 1% on average, led by Singapore where rents are likely to rise by more than 10%.

Data centres top alternative sector, while cold storage and healthcare gain momentum

Investors continue to target alternative sectors which have benefitted from structural changes driven by the pandemic.

Data centres remain the top focus (Figure 3), with $4.2 billion worth of data centre properties changing hands in Asia Pacific in 2021, up 88% year-on-year. Interest in cold storage has also strengthened further, with CBRE observing growing investment demand from cold storage-related occupiers in 2021.

Figure 3: Investor interest in alternative sectors by property type

Source: Asia Pacific Investor Intentions Survey 2022, CBRE Research

With life science companies continuing to perform well, healthcare-related assets such as R&D business parks and medical buildings are also drawing investor interest. Investors should identify potential asset disposals from pharmaceutical companies looking to recycle capital for future R&D or bring down interest bearing debt.

ESG moving up the agenda

ESG is also gaining traction, with more large investors seeking to integrate ESG criteria into their investments. Adoption is being driven not only by a need to comply with regulatory requirements, but also to preserve future asset value and by meeting the demands of occupiers.

Approaches to implementing ESG strategies include prioritising the purchase of buildings with green certifications and retrofitting existing properties to enhance energy efficiency, water usage and wellness.

We are seeing more investors seeking to access green loans or issue green bonds to finance such initiatives. Bloomberg data show that the sustainability debt market in Asia Pacific has registered strong growth in recent years, with more than $200 billion in ESG issuances recorded in 2021. With buildings accounting for about 23% of the proceeds of green bonds, Asia Pacific investors are clearly aware of the importance of sustainability and will increasingly depend on green financing to mitigate any climate-related risks that could potentially impact their assets.

Charging ahead

In Chinese astrology, the tiger is one of the animals most closely associated with “yang”, or strong, positive energies.

CBRE expects the region’s economic recovery to reflect this positivity and gather pace in the coming months, rewarding investors who are upbeat on Asian commercial real estate.

For more in-depth insights into surveyed Asia Pacific investors’ buying appetite and preferred real estate strategies, sectors and markets for 2022, click here.

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