Asia’s demographics and job creation will be driving factors in the region’s property growth over the coming decade, according to Chiang Ling Ng, chief investment officer for Asia-Pacific at Hines, one of the world's largest privately held real estate investors and managers.
The pace of that growth is likely to be such that Asia will grow from being home to the smallest global share of investment property, at 30% in 2022, to the highest share, at an estimated 36% by 2032, according to Hines research.
The economic climate in Asia is similar to that of other major regions, but with less turmoil and relatively tame inflation, Ng told AsianInvestor.
“Despite all the risks, we see lots of opportunities for us to grow in Asia, which our research indicates will be the largest market of the three major regions in the future,” she said.
“Asia was a late starter to institutionalising real estate, and while there may have been concerns around China, [it has] now opened," she said. "That'll drive a lot of economic activity that has been missing for some time.”
When it comes to China, many investors have been concerned about disruptions the country’s closure has caused to Asian supply chains and whether there will be a recovery to pre-Covid levels of operation. But Ng said supply chains were being reconfigured and that opportunities existed to diversify and increase resilience through operations in in other Asian nations such as Vietnam and India.
“Generally speaking, the manufacturing base of the world remains in India," she said. "That's going to create jobs, and the economic activity that follows will create wealth and a very healthy ecosystem which will feed itself.
“As people get richer, they will want better offices, better homes and better shopping experiences, and we believe that trend is going to drive the real estate sector in Asia on a marginal growth basis that will certainly be higher than what we'll see in America or Europe.”
The retail sector is one that Louise Kavanagh, chief investment officer and head of Asia-Pacific real estate at investment manager Nuveen, also says will perform well in 2023.
“We believe that necessity-, discount- and convenience-based retail will positively surprise us in a fragile market,” Kavanagh told AsianInvestor.
As consumers "trade down", stay local and continue to require essential items such as groceries, the focus will be on occupiers and retail formats that benefit from those spending patterns.
“Investors can take advantage of the stable income returns neighbourhood grocery-anchored retail can provide during an economic downturn," she said. "Traffic at these types of retail assets has proven resilient and defensive against e-commerce trends, reinforcing our view that not all retail is the same.”
Nevertheless, Hines' Ng said the regional price-discovery process in Asia appeared to lag those in the United States and Europe. She said that apart from in Japan, where Tokyo office capitalisation rates fell in the second quarter of 2022, initial signs indicated that cap rates were rising in response to higher debt costs in South Korea and certain markets in Australia and Singapore.
With higher debt costs, the opportunity for leveraged yield in Asia has largely evaporated.
“It’s now a lot harder to get into the cash-on-cash return because there's so much debt in the system, which is going to affect valuations as well," Ng said. "You need long-term money to sit through this time of adjustment, but if you own good real estate, many cycles have proven that it will come up better than before.”
She said opportunities remained alongside secular trends throughout Asian markets that long-term investors could exploit.
Rental demand has been supported in locations where homes have become increasingly unaffordable, including developed markets such as Australia, South Korea and Japan.
In Australia, Hines has started a build-to-rent program with Cadillac Fairview, the real estate investment arm of Ontario Teachers’ Pension Plan, to buy land to develop buildings specifically for residential leasing.
“That's really targeting something beyond the current short-term difficulties and challenges, and [it's] a way for us to make use of this climate’s opportunities, because there are sellers that will be experiencing some of liquidity squeeze and there’s the opportunity for us to step in and pick up those assets to build something that will be transformational and serving a demand that is unmet,” Ng said.
Hines sees opportunities in Japan's logistics sector, and it has an established own-to-rent programme.
In South Korea, the firm is targeting logistics and keeping an eye on cold-storage demand, which has surged since the pandemic began.
“Over the long term, we're also optimistic about the office, life sciences and mixed-use retail sectors in the Asia-Pacific region,” Ng said.