Booming inflows of investment across Asia’s real estate sectors, and particularly into China and logistics assets, look set to continue this year as global investors seek to benefit from the region’s quick recovery from Covid-19 pandemic.

However, some investors are growing concerned of potential asset bubbles, while the eventual end of government stimulus could impact some businesses barely surviving today.

Those were some of findings of a new survey by the Urban Land Institute and auditor PwC, which was released on Thursday (April 8).

The report was based on interviews with various real estate leaders, investors and others. They said real estate has enjoyed strong traction with investors, due both to fairly predictable long-term returns and because it offers an inflation hedge.

“Real estate will be looked at not as an alternative but as an essential investment component of anyone’s portfolio because it’s got the return along with an inflation hedge,” one global investment manager told the report’s authors.

David Faulkner, president for Asia Pacific at the ULI, agrees.

“In my view there is not much scope for [property] yields to come down much, but it generally offers a better return than other alternatives, and so is increasingly being seen as a mainstream play [by institutional investors],” he told AsianInvestor.

The most appealing cities for property investment

The most appealing cities for investment
Source: Emerging Trends in Real Estate Asia Pacific, Europe, 
United States and Canada, 2021

Interviewees were particularly focused on Asia Pacific, with many global investors “placing their biggest growth bets” on parts of the region.

“As one industry leader points out, ‘a lot of people concluded back in March 2020 that there was probably going to be a correlation between who recovers first [economically] and who has handled the pandemic better’”.

That only buffered the appeal of a region already benefiting from long-term structural trends such as a rising middle class in China, India and other markets, and relatively high savings rates.

China’s property market is proving particularly appealing, given its status as the only major economy to record economic growth last year. Beijing has set a GDP growth target of over 6% for this year.

Other Asia markets also gaining global investor interest. Faulkner said Vietnam is seeing a rising level of demand, as is Singapore, Australia and Japan, albeit from investors who are more carefully looking to invest into Asia.

More is likely. As a global investment manager told the study’s authors, “[Asia Pacific] as a whole is likely to outperform the rest of the world for the foreseeable future”.

Source: Real Capital Analytics

LOGISTICS STRENGTH

Logistics- and data centre-related property assets are leading the appeal, with their already burgeoning attraction only growing further as e-commerce flourished during the pandemic.

The report notes logistics investments “accounted for 21% of global market activity in 2020 compared with a long-term average of 13%”.

Some investors have become more cautious of the sector, given a rapid increase in the pricing of logistics assets. However, as Faulkner noted, “there is a view that logistics are already overpriced, but they can go higher”.

Data centres also look an appealing investment, particularly as the amount of assets is limited and the supply of new ones will take some time to materialise.

The research arm of property consultancy and investment company JLL also believes logistics assets look a good bet, predicting the low rate environment could spur more investment and cause their yields to “potentially compress by a further 50-100 basis points (bp) over the next five years”.

The research division adds that logistics asset spreads compressed by 60bp more than other sectors in the region between 2016 and 2020.

Faulkner notes another issue to consider in the logistics space is a rise in desire of some companies to shift from ‘just in time’ good supplies to ‘just in case’. The latter may require more warehousing space, but that might well also be placed in city centres, particularly as some offices shrink in size.

KEY CONCERNS

While interviewees for the study were generally optimistic about real estate in Asia, they harbour some broader concerns.

One is the possibility that massive stimulus measures could lead to asset price bubbles. The report notes that governments and central banks spent $24 trillion to help stabilise the global economy, causing global debt to hit a record $281 trillion, or over 355% of global GDP, according to the Institute of International Finance.

Some investors fear this could cause rapid peaks in fashionable asset prices, which could prove to be quite fragile. “There is a real risk of an asset pricing bubble resetting, and that would have a very material impact on real estate,” one US investment manager told the report’s authors.

There is also the likelihood that some businesses currently receiving government support, such as hospitality and leisure, may go under once this support is withdrawn. Of course, that may also finally offer would-be distressed asset investors the opportunity they have been waiting for, noted Faulkner.

“As some government support measures come off, people will look at their books and think they can’t keep all these assets, so there is an expectation they will sell some on,” he noted.

But the biggest concern on investors’ minds? The potential that vaccinations to fall short, or Covid-19 mutates into a form that can reduce their efficacy.

As one interviewee noted: “The vaccine rollout itself is faster in certain countries than people had assumed, but globally it’s slower than perhaps everyone had hoped. And it could quite easily go in an unexpectedly negative direction. Or, alternatively, other pandemics could emerge in the future. I think we all need to be alive to that.”

This article has been updated.