Commercial property forecast for record year in Asia

An attractive credit spread on commercial property is expected to continue luring institutional investors as they seek quality core assets for long-term growth.
Commercial property forecast for record year in Asia

Commercial real estate in Asia Pacific is forecast for a record year of sales, driven by the pursuit of quality core assets by institutional investors.

It comes as asset owners are no longer seen as opportunistic buyers of property, but rather are looking to long-term growth. In Asia Pacific, Korea is seen as one of the brightest markets for commercial property.

Cuong Nguyen, Singapore-based associate director of research and strategy at M&G Real Estate, noted how investor sentiment had improved, with investors in Korea, Malaysia and Japan looking to increase allocations to real estate in the region.

“Investors outside Asia no longer see the region as an opportunistic market,” he stated.

A senior figure dealing with property investors in Asia said the theme over the next 12 months would be further development of core assets. “There is a lot of competition from institutional investors for good quality core assets because of the lack of them,” he stated.

Core real estate assets are high-value single assets that offer a stable yield generated by a high-quality tenant (or mix of tenants) locked into a long-term tenancy agreement.

In contrast, value-added funds can take on more development risk than core funds, but offer more visibility on yield than opportunistic funds.

Korea is one market that is seeing a rise in the number of properties transitioning to core assets, in both office and retail segments.

Nguyen noted that the credit profile of core retail space tenants in Korea was among the region's highest. Longer leases and high-quality tenants has seen investors willing to pay more – or accept a lower yield – to acquire assets in Korea.

In December last year, Korea saw a shopping mall sold with a master lease structure when CBRE advised on IGIS Asset Management’s W167 billion ($153 million) sale of Wonju City Shopping Mall to Korean reit JR AMC. A master lease sees individual tenants pooled into one long-term lease.

Structuring a multi-tenant retail building into a long-term master lease can transform a value-add asset into a core asset. This can attract investors who would receive a lower yield, noted Don Lim, capital markets senior director at CBRE Korea.

Investors have also been attracted by lower borrowing costs, enabling them to leverage up investments. “Bond yields have come down by more than cap rates [in Korea]," said Lim, referring to returns generated by real estate assets. “Investors can enjoy a cap rate on core of 5 to 5.5%.”

This gives a 1.5 to 2% credit spread over borrowing rates in Korea. “Investors can get their required yield of 6.5 to 7% given 55 to 60% loan-to-value ratios available,” added Lim.

Nguyen observed that the credit spread – or the difference between returns on real estate and sovereign bonds – was now more attractive in Korea and Australia than Japan.

Korea’s central bank held its benchmark interest rate at 2% on February 17, but is widely expected to lower rates again this year.

“Pensions, insurance companies and cooperatives are the investors [in Korean real estate],” said Lim. “It will likely be the trend for the time being until the interest rate goes up and the spread between the cap rate and loan interest rate narrows so the leverage effect becomes less to meet the compressed cap rate.”

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