Rising inflation and cheaper borrowing costs are leading institutions increasingly to view property as a safe haven, resulting in an expected rise in allocations to the asset class in Asia this year.
“More institutional money is coming to real estate, or is available for real estate, both on the debt and the equity side,” says Paul Guest, Asia-Pacific head of research and strategy at LaSalle Investment Management.
The firm’s parent, Jones Lang LaSalle, forecasts that direct investment into commercial property in Asia will reach $110 billion this year, up from $94.6 billion in 2012. Regional inflows are expected to account for about one-quarter of the $450-$500 billion estimated global total this year.
In the long term, Asia will be the biggest beneficiary of increased property investment flows, according to a Jones Lang LaSalle report, The Advancement of Real Estate as a Global Asset Class.
Direct commercial property investment in Asia last year was 77% of the 2007 peak value, compared with 62% for the Americas and 46% for Europe, the study indicates.
“Real assets like infrastructure, land and real estate have tangible value,” explains Guest. “When inflation starts to accelerate, intangible assets tend to underperform.”
“What was particularly evident in 2011, and most of 2012, was a disproportionate appeal for the safest kind of real estate,” says Guest, translating to core property assets.
He adds that with the easing of economic worries hanging over Europe and the US, there has been less risk aversion. “The predominant desire is still for prime core property, but there are a bigger number of investors, including institutional investors, willing to look a little bit up the risk curve.”
In Asia, LaSalle is looking at upgrading B+ grade real estate to capture the greater risk appetite, says Guest. It also favours logistics and hotel properties, as both are tied to Asia’s long-term economic growth.
Outside of Australia, the region's logistics markets are relatively immature and ripe for the development of modern facilities, which generate good quality income streams, says Guest.
In the hotel sector, occupancy rates in Hong Kong, Singapore, South Korea and Australia are above 80%. "In Hong Kong, it’s over 90%," notes Guest.
As such LaSalle sees opportunities in building new hotels, renovating old ones, or repositioning by bringing in an international hotel operator to replace a local brand. "There are different tactics, but we like that sector."
Meanwhile, property debt is also expected to gain in popularity this year, with a recent Preqin survey of institutional investors showing that 34% plan to allocate to real estate debt funds this year, compared to 8% in 2012.
Debt fund investments are usually added to real estate portfolios at times when the vehicles are seen as generating returns with a lower level of risk than equity investments in property, Preqin notes.
The $1.65 billion Fortress Japan Opportunity Fund II was the second-largest real estate debt vehicle to close during 2011-12, outsized only by the $2 billion Blackstone Real Estate Special Situations Fund II.