Capital flows from Asia into US and European commercial real estate have been grabbing headlines recently. What is less widely discussed is how global investors are increasingly looking to Asia’s commercial real estate market.

Take Aviva Investors. Almost half (44%) of its £4.1 billion ($6.6 billion) in Asia-Pacific assets under management is invested in property. The firm has made 224 investments in Asia overall for 35 investors globally, ranging from $10 million to $100 million in size.

All of these deals it has done with local partners given the need for an on-the-ground presence, said Bart Coenraads, Asia head of Aviva Investors’ real estate multi-manager unit.

“We continue to look at new markets,” Coenraads told AsianInvestor, singling out Indonesia as one with potential. Last year, the firm witnessed an increase in enquiries about the country. “We have entertained some of these discussions this year,” he added.

Coenraads noted that opportunities to invest in markets that have traditionally been relatively closed to foreign capital, such as Indonesia, are opening up amid nervousness about the consequences of the US Federal Reserve tapering its large-scale asset-purchasing programme.

“Investors cannot expect cap-rate contraction to be there for next five years,” Coenraads commented.

Capitalisation (cap) rates are calculated by dividing an asset’s annual income generated by its value. Rising property values cause cap rates to decline if generated income does not rise by an equivalent amount.

Cap rates have come down significantly across Asia, noted Coenraads.

Uncertainty about the potential for commercial real estate value increases in terms of US dollars has been highlighted by a broad weakening of Asian currencies in the wake of a stronger dollar since July.

The rise in the currency’s value is underpinned by expectations about the timing of interest-rate hikes by the Fed, which is expected to put downward pressure on property values in general.

Consequently, institutional investors are focusing more on the income that assets can generate – ranging from long-term leases for office space to average daily rental (ADR) income per occupied room for hotel assets.

They are also locking in gains to protect portfolios from potential declines in property values. Coenraads pointed to one investment by Aviva Investors in Japan’s logistics sector that achieved a 2x multiple within 18 months following exit early this year.

At the same time, he expects to see continued strong performance from logistics sector investments “for the next couple of years”. The firm has been investing in logistics assets in Australia, China and Japan via the funds that it allocates to.

Coenraads also sees potential in the hospitality sector. He noted that hotel ADRs have remained high despite an ageing stock of hotel assets in Asia-Pacific, arguing that investment in new hotel assets has not kept pace with increases in demand since the global financial crisis.

A huge number of projects are in the pipeline. A Jones Lang LaSalle report earlier this year estimated that 2,494 hotels projects involving 584,554 rooms were in the pipeline across the region at the end of 2013 – with China accounting for 74% of these rooms, followed by India (10%) and Indonesia (6%).

Among the hotel operators adding rooms is Hilton Worldwide, which has been focusing on managing, rather than owning, assets. For example, the Waldorf Astoria Beijing, which opened earlier this year, is operated by Hilton Worldwide but owned by Chinese state-owned enterprise China Oil & Foodstuffs Corp (Cofco).

The trend was highlighted by the October 6 announcement of the sale of the Waldorf Astoria New York to Hilton Worldwide to Chinese insurer Anbang Insurance Group for $1.95 billion, the most expensive hotel sale ever. The hotel operator is set to continue to manage the hotel under a 100-year management agreement.

To put the size of the transaction in perspective, Asian institutional investors put $8.3 billion into North American commercial real estate in the first half of this year, according to figures from Real Capital Analytics which include transactions over $10 million, a 46% year-on-year rise.  

Over the same period, cross-border Asian institutional capital flows into Asian commercial real estate increased 11% year-on-year to $4.4 billion, according to figures provided by the Asia Pacific Real Estate Association, also from Real Capital Analytics.