Core property in Asia is expensive and will get more pricey in the short term as even big Chinese institutions are being outbid and a growing number of deals are falling through, say real estate investors.

Yet as cash-rich sovereigns, pensions funds and insurers seek to put their money to work in this low-yield environment, many are not comfortable investing in third- and fourth-tier cities, which offer the prospect of higher returns.

And Asian investors already active in global real estate are finding the market has recently become a lot more competitive.

Chinese investors trying to secure trophy assets overseas are now being outbid, said Collin Lau, founder of Hong Kong property investor BEI Capital Partners and formerly head of global real estate at China Investment Corporation. That suggested they are exercising more caution, added Lau, speaking at last week’s PERE Global Investor Forum in Hong Kong.

Lau added that when his investment team was looking at second- and third-tier markets, “we concluded that maybe we should slow down, rather than expand into places we were not all that familiar with”.

UBS said last week that housing prices in particular were “in many cases, fundamentally unjustified”, according to its global real estate bubble index. The risk of a property bubble is highest in London and Hong Kong, but Sydney, Vancouver, San Francisco and Amsterdam are also “significantly overvalued”, noted the bank.

UBS said valuations were also stretched in Frankfurt, Geneva, Paris and Zurich, and to a lesser degree Singapore and Tokyo. The US cities of New York and Boston are, perhaps surprisingly, far more fairly valued, while Chicago is undervalued relative to historical prices.

Core market yields are now very compressed, with 3.5% to 4% the new annual norm. This has led some investors to look at structured deals.

Insurers are demanding a constant yield of 5%, while Chinese and Korean investors are seeking 6%, noted Greg Penn, managing director for capital markets at real estate services firm CBRE. “So it depends what part of the deal you’re willing to give up to secure that.”

Also speaking at the PERE event, he said Chinese and Korean investors were also looking at European gateway cities in the hope of capturing extra yield.

Asian deals are falling through in greater numbers, added Penn, because it’s a seller’s market and sales terms and conditions being imposed are becoming too onerous.

Just last week, a big consortium deal to acquire the Asia Square 1 building in Singapore was reportedly put on hold due to disagreement over the terms. Reported to be among the bidders for what would be one of the biggest ever office acquisitions in Singapore were sovereign funds Abu Dhabi Investment Authority and Korea Investment Corporation, US pension plan Calpers and Chinese insurer Ping An.