Asia-Pacific investors are taking advantage of growing Chinese distress to invest more in Chinese real estate, new research shows.

And they are likely to continue doing so even though transaction volumes in the rest of the region are likely to recover after a relatively weak first quarter.

That's the view of global property services firm CBRE, whose data shows an uptick in Chinese real estate investment in the first three months of 2019 – to $8 billion from around $7 billion a year earlier.

Leo Chung

“Around 75% of foreign investment in China came from Asian investors with Singaporean capital the stand out. Other active capital sources included investors from Hong Kong and Japan,” Leo Chung, associate director for research in Asia-Pacific at CBRE, told AsianInvestor.

And the trend could be extended if the Chinese government’s tighter control of capital requirements makes more assets available for sale as owners face financial difficulties, he said.

For a second quarter running, dedicated real estate funds deploying newly raised capital comprised the biggest investor group, Chung added.
 
A notable example was the sale of the combined office and retail Yifang Tower in Shanghai in March. This was bought by Singapore-based conglomerate Keppel Corporation for $685 million from Dalian Yifang Group, a company affiliated with Beijing-based property developer Dalian Wanda.
 
The purchase was made through a joint-venture company owned by a fund managed by Alpha Investment Partners, the private fund management arm of Keppel, along with other institutional co-investors.

LOWER REGIONAL ACTIVITY

Together with Australia, Korea, Taiwan and Singapore, China countered the broader region's downward trend with commercial real estate transaction volumes dipping 4.5% year-on-year to $26.3 billion.

Japan, which registered the highest transaction volumes in the first quarter of 2018, saw a drop from around $9 billion to under $7 billion.

According to CBRE, demand for Japanese commercial real estate remains solid but the widening price gap between buyers and sellers has been somewhat constraining transactions.

A slowdown in activity by Japanese real estate investment trusts also impacted negatively. Most J-Reits are focused on repositioning assets rather than adding to their portfolios, CBRE said.

In general, Asian capital accounted for nearly 70% of total cross-border investment in the region, which rose by 8.9% year-on-year to $6.3 billion for the quarter.

“Singaporean investors have more diverse investment destinations than other investors, including China, Japan, Australia, Malaysia and Vietnam, while Hong Kong investors are mainly focused on China,” Chung said.

The increased activity by Asian investors in China follows a retreat by Chinese investors as capital controls have helped curtail Chinese hunger for overseas assets.

LOWER YIELD OUTLOOK

Despite a 23% year-on-year decline in capital inflows from outside the region, property funds managed by international fund managers remained active, especially in the office and logistic sectors.

There is also growing scope for the international appeal of Asia-Pacific commercial real estate to recover now that the US Federal Reserve appears to have called a halt to its latest interest rate hiking cycle.

This has also led to some central banks in the Asia-Pacific region taking a dovish turn, Chung noted, which in turn has the potential to not only lift investor sentiment but could also support the occupier market, keep borrowing costs down, and improve the comparative attractiveness of property yields.

While prime office yields in cities like Hong Kong, Tokyo and Tapei are below 3%, cities like Seoul (4.7%), Shanghai (4.15%) and Sydney (4.6%) still offer attractive yields relative to government bonds.

Hence, India has seen two cuts in interest rates so far this year, while China has lowered its required reserve ratio.

Australia, New Zealand and Korea have also adopted a more neutral tone on interest rates, while Japan continues to maintain a loose monetary policy, leading Japanese investors to diversify away from domestic government bonds.

“With the interest rate is likely to stay low for longer, it reduces the yield expansion pressure throughout the remainder of 2019. Property yields are likely to hold firm with potential mild yield compression pressure driven by investment demand,” Chung said.