Chinese asset owners have in recent years hogged much of the limelight when it comes to global real estate investment but other Asian investors now look set to grab a growing piece of the action.
A new investor survey by global property services firm CBRE shows a clear majority of investors in the Asia-Pacific region to be positively disposed towards commercial real estate, despite the nagging global economic and political uncertainties.
More than eight out of 10 investors surveyed by CBRE indicated that they intend to maintain or exceed their property purchasing momentum from the previous year. The main reasons specified were the asset class's relative stability followed by a desire for increased asset diversification.
A total of 348 responses were received from a range of asset owners and asset managers, most of them based in Asia, including pension funds, property developers and fund managers, and private equity firms.
Four in 10 of those polled chose office sector assets, the staple of real estate investments, as their preferred sector, up from 34% in 2018.
That comes after Chinese real estate investors were net sellers in overseas markets in 2018. The disposals from Chinese investors were driven by two forces – a need to strengthen balance sheets and, separately, a desire to recycle capital for future investments, Leo Chung, associate director of research at CBRE Asia Pacific, told AsianInvestor.
Chung said he expects this trend to continue in 2019, even if some Chinese investors with recycled capital look to inject these funds offshore.
“More recently, we observed select Chinese investors shift tactics and start to use indirect ways to gain overseas real estate exposure through investing in real estate funds,” Chung said. “The Chinese property investors have by no means retreated, but in our view will be more strategic in their future allocations.”
Part of the void left behind in overseas markets by Chinese investors is set to be filled by Japanese investors – but not necessarily everywhere.
One hurdle are the rising currency hedging costs, which could make it more difficult for Japanese investors to compete for US real estate deals, according CBRE’s Chung.
As a result, he believes a growing number of Japanese investors will look more for opportunities in Europe, where the yen-euro differential mitigates currency hedging costs.
There are signs of that already happening. Last year, for example, Japan’s Sumitomo Mitsui Trust Bank acquired an office building in London, the first investment by this firm into UK real estate.
But hedging costs are not the only consideration for Japanese investors, many of whom have long track records investing in international real estate.
Elysia Tse, head of research and strategy for Asia-Pacific at Chicago-headquartered real estate manager LaSalle Investment Management, said she still sees the US market as attractive for Japanese investors, even if low-risk core assets are only generating 3-4% income yields in the current late cycle-priced markets.
“For Japanese investors, overseas real estate investments are not a short-term play where currency can become a more tricky component. They are looking for a long-term stable income streams as an alternative to Japanese government bond that is yielding close to zero,” Tse said.
Japanese experience of international markets will likely also be reflected in the diversity of their real estate investments, experts forecast.
“Beyond the realm of direct real estate investment, Japanese investors will venture into real estate debt investment opportunities with more readiness than their regional peers,” Chung said.
Preqin data shows, for example, that the Aisin Employees’ Pension Fund, which looks after the interests of workers at one of the world's largest auto-part makers, plans to further invest in a real estate debt fund after committing to two private real estate funds last year.
KOREANS LOOKING TO EUROPE
Currency hedging costs have already made Korean investors pivot towards Europe in recent years, mainly the office sector, a subsector they are more familiar with and fits a certain risk profile, Chung said.
South Korean investors poured a record €7.3 billion ($8.28 billion) into European commercial real estate last year, with volumes rising nearly sixfold over the past five years, according to property services firm Cushman & Wakefield. The UK accounted for more than 40% of the total, with £2.3 billion ($3.05 billion) going into London property. The investment push has been led by the likes of sovereign wealth fund Korea Investment Corporation and Korean state retirement scheme National Pension Service.
Korean investors prefer the European market for its attractive yield spread against borrowing costs, Chung added. By way of example he pointed to Hana Financial Investment’s January acquisition of a Frankfurt central business district office building at a borrowing cost of less than 2%.
Alongside Singaporean investors, Korean investors sit on significant capital and mature domestic real estate markets. Given limited availability of stock in their markets, Korean and Singaporean capital has also helped to fill some of the gaps left behind as Chinese investors have rebalanced their allocations in 2018. With Asian capital still hungry for portfolio diversification, this trend is likely to continue in 2019.
Compared to Korean investors, Singaporean investors have a more diverse sector focus. Last year, their top-three asset types were logistics, office and multi-family. Some notable deals done by Singaporean investors in 2018 include Capitaland’s purchase in September of a US multifamily portfolio in September, Fraser Properties’s acquisition in July of a European logistics portfolio and Ascendas Singbridge’s entry into US with the purchase of an office portfolio in September.
“Singaporean investors will be active on a broader global base with a tilt towards value plays," LaSalle’s Tse said. "Those value plays may lead them to the US and the UK, but there might be times when they would purely look at more attractive entry points, which may not always lead them to the most developed and expensive markets.
OTHERS TO FOLLOW?
Encouragingly, investors in Southeast Asia are exhibiting a heightened interest in portfolio diversification too, not least among investors in Thailand and Malaysia, which are becoming more active.
Similar to Korean investors, they are looking for stabilised assets in Europe, according to Chung.
“For Malaysia, the leading investor will be Employee Pension Fund (EPF), [which] was turning more active in 2018," he said. "For now, Thailand investors are mainly focused on hotel assets, but we expect this story to transpire into something bigger in coming years.”
According to Tse, the increasingly low yields in the Australian market might also spur more asset owners Down Under start to considering an overseas strategy.
Major institutions such as the Australian sovereign wealth fund Future Fund and AustralianSuper already have significant overseas property exposure.
“A majority of Australian investors either need to reduce their return expectations in the domestic market or consider to take on the risk of investing overseas. That is the decision many of them need to make in the years to come,” Tse said.