The ongoing Covid-19 pandemic – more commonly the coronavirus – is likely to leave its mark on commercial real estate transactions. Investors are still keen to invest in the asset class, however, according to real estate broker CBRE’s Investor Intentions Survey 2020.
“We feel that with the events of the last few days in Europe and the US, Asia Pacific investors will divert their interests to Asia Pacific as Asian economies recover before the US and Europe,” Henry Chin, head of research for Asia Pacific and Europe, the Middle East and Africa at CBRE, told AsianInvestor.
“Within Asia Pacific, gateway cities remain the focus as investors look for stable income and higher yield spread. Japan and Australia will remain the focus. Korea and Singapore will also gain attention for core assets,” Hong Kong-based Chin added.
The survey, which was conducted between December 16, 2019 and February 16, 2020, among real estate funds and institutional investors including sovereign wealth funds, insurance firms and pension funds, displayed positive investment. During this period, the coronavirus outbreak emerged, negatively impacting investment sentiment and prompting many investors to move into wait-and-see mode.
Among survey responses received after the announcement of the Wuhan quarantine on January 23, CBRE observed a shift in buying intentions, investment strategy and sector focus. Three-quarters of responses received after the announcement of the Wuhan quarantine, however, still stated that they plan to be more or as active this year as they were last year.
But investors might need to brace themselves, as deal execution will be severely delayed due to the virus and its limitations on travel. That trend has already started, according to Joel Rothstein, who chairs the Asia real estate practice at US-based law firm Greenberg Traurig and reviewed CBRE survey’s findings.
“The reported intentions of investors to complete more deals in 2020 than 2019 is unlikely to become a reality. The lingering effects of Covid-19 will extend well into the year. If the survey were taken today, the consensus view would be fewer deals in 2020 than 2019,” Rothstein told AsianInvestor.
Given the solid demand for real estate assets in the region, sourcing attractive deals remains a challenge. Notwithstanding all the current market disturbances which impact both inbound and outbound investors, clients are actively continuing to seek out and assess investment opportunities, Rothstein explained.
Many investors and fund managers have a great deal of “dry powder” – available capital – to deploy. If an attractive opportunity is found the investor will try to keep the opportunity in motion despite the current condition. It is just that the deal just might not close as easily or as soon as it would have in a different environment.
“Deals are now progressing at a very slow pace. The effects of travel restrictions should not be underestimated. In Asia where much activity is transacted face-to-face, critical meetings are being postponed and necessary due diligence site visits are not occurring. The end result: deals are on a slow track,” Rothstein said.
The survey received a total of 610 responses. Of those, 88% of respondents were companies in Asia Pacific. The remaining 12% were based primarily in North America, Western Europe and the Middle East.
KOREA AND SINGAPORE LEAD
Asian investors displayed strong intentions to invest abroad this year, led by Korean and Singaporean groups. Mature markets will be the main focus for Asian investors as they seek assets that provide stable income streams amid the deteriorating economic outlook, the survey showed.
While Korean asset management companies are set to target further acquisitions in North America, the main geographies of focus among Singaporean investors are across North America, Western Europe and developed Asia.
While only 40% of investors from Hong Kong and Japan intend to invest abroad, CBRE expects these buyers to seek overseas assets that provide steady income streams as part of a strategy of diversifying their real estate holdings. Hong Kong investors displayed stronger interest in developed Asia and Western Europe while Japanese investors are mainly focused on North America.
“Japanese and Australian investors will continue to invest overseas in the long term, and their preferred mode of investment will be to invest indirectly through funds. They will be keen on North American markets to diversify their portfolio,” Chin said.
Rothstein recognises these trends but points out that although overall deal activity from China-based investors has declined, the survey did not take into account a second wave of China investors.
“This wave is currently being led by family offices and club fund deal sponsors aggregating funds from investors with offshore, non-RMB capital to deploy into deals,” he said.
STICKING TO CORE
Survey responses received after the Wuhan quarantine displayed a higher preference for prime core assets, which indicates stronger demand for properties providing stable income streams.
In terms of investment preferences within Asia Pacific, office assets remain the preferred sector for investment, according to the survey. The appetite for logistics is strengthening further thanks to solid e-commerce industry growth and rising demand for modern logistics facilities.
Demand for retail and hotel assets is fading due to falling rental income and a slowdown in tourist arrivals as a result of global and regional travel restrictions.
On top of these trends, Rothstein pointed to a strong interest in multifamily residential assets, particularly portfolio deals.
“In Japan, rental residential opportunities are being sought by investors who seek stable and predictable cash flow. In China, investors are trying to find ways to capitalise on the growth and development of the residential rental market as China tries to expand the housing options available to its citizens,” said Rothstein.
More alternative real estate assets classes continue to be of strong interest to both Asia inbound and Asia outbound investors. Other than logistics and multifamily, these assets include data centres and senior as well as student housing.
“To some investors, alternative asset classes are an attractive alternative to overpriced core office assets. For others, the alternative asset classes are part of a strategy to grow a platform of assets or to create an operating business rather than just a pure real estate play,” Rothstein said.
The demand for Asia Pacific real estate has made the market increasingly crowded. Most recently, Pimco took over Allianz Real Estate and the new $100 billion+ juggernaut is expected to increase investments into the region.