Demand from investors in Asia is high and rising, especially for real estate in developed markets such as Japan, the UK and North America – but the shine has come off Chinese property, say asset managers.
Savills Investment Management has already won two institutional mandates this year for Japanese real estate, each for about $300 million to $400 million, said Justin O’Connor, chief executive of the London-based firm. Moreover, it is expecting the second Japan real estate fund it is marketing to raise “a lot more” than the first fund’s $200 million, he told AsianInvestor.
This is despite the fact that internal rates of return have dropped to 12-13% for the coming fund, from 15% provided by the first product, noted O’Connor (pictured below).
“There is decent investor interest in logistics and retail real estate [in Japan],” he added. “There are still yields of 4% to 5% to be made in commercial property, which are safe and predictable.”
Indeed, Asian demand for real estate is growing, particularly from Japan, said O’Connor, as institutions seek higher income than is available in other asset classes or in domestic real estate. Savills IM plans to launch a third Asia real estate fund late this year to tap this interest, with a target size of $500 million.
However, there is a notable exception to the positive flows. Chinese property has lost appeal with foreign investors in light of its economic slowdown in recent years, noted O'Connor, and there are concerns about supply in tier three and four cities. Moreover, “tier one prices are very high in large part because capital can’t leave the country”.
Elsewhere, Asian investors continue to focus on the UK and North America, with a preference for office assets over other sectors, said Christopher Andrews, London-based head of client relationships at M&G Real Estate.
“We are seeing renewed demand flowing from China and Hong Kong for London office assets,” he added, “and that is now spreading towards the major cities of regional Britain – Manchester, Birmingham etcetera.”
Indeed, neither Britain’s vote to exit the EU last June nor the election of Donald Trump as US president in November seem to have had a negative impact on UK or US real estate prices. If anything, though, these events have raised interest in Asian property, suggested Andrews and O’Connor.
“Both Brexit and the election of Donald Trump have led many US and European investors to become worried about political uncertainty, as they are not sure what will happen in this environment,” said O’Connor.
“Trump is a real estate guy, so he’s unlikely to do anything in terms of taxes against property, and it’s possible he will pump the economy with spending and tax cuts.”
But investors are concerned about protectionism that could affect global trade and economic growth, noted O’Connor. “That would affect other countries, but also the US.”
That in turn is leading European and US investors to consider allocating more to Asian real estate, he added. “The US core markets are already very fully valued, meaning the only real opportunities left are those being sold at a discount, which are effectively distressed. And there aren’t very many of those.”
Meanwhile, M&G Real Estate replenished its team this month with the hire of Jonathan Hsu from Invesco. He joins as Asia head of research to replace Cuong Nguyen, who left the post in June. Hsu was an associate director at Invesco Real Estate in Hong Kong and has moved to Singapore for his new role. Invesco declined to comment on the departure.
M&G Real Estate Asia manages around $4 billion and employs 50 people in offices across Singapore, Tokyo and Seoul.