Investment into Asia Pacific property is likely to substantially drop this year amid Covid-19, but the market could show greater resilience than those elsewhere, say real estate experts.

“Given the current economic situation, we expect 2020 [global commercial real estate transaction volumes] to be well below the activity we recorded in 2018 and 2019,” said David Green-Morgan, Singapore-based managing director for Asia Pacific at Real Capital Analytics (RCA).

“Before Covid, we were expecting 2020 to be something similar to 2019 in terms of investor activity,” he told AsianInvestor.

David Green-Morgan, RCA

Others were similarly downbeat. “Given the outbreak of Covid-19, capital-raising [for property investment] in 2020 may face several constraints,” said Amelie Delaunay, director of research at the Asian Association for Non-Listed Real Estate Vehicles (Anrev).

“Some investors who might have considered themselves underweight in real estate before the Covid-19 pandemic could now find themselves over-exposed,” she told AsianInvestor. “And certain sectors, such as retail and hotels, will likely experience even more turbulent times ahead. The crisis might lead to some asset revaluation too.”

The early signs have been ominous for Asia Pacific property investment. For the first quarter regional commercial real estate transaction volumes stood at $24.2 billion, just 14.2% of the 2019 total figure of $171.1 billion, by RCA figures. Global volumes have also dropped but less markedly; the first quarter total was equivalent to 20% of the year’s $1.05 trillion total volume.

“The US and Europe first quarter numbers were relatively normal; it was Asia Pacific that really showed the downturn,” Green-Morgan told AsianInvestor last week (see table below).

COMMERCIAL REAL ESTATE TRANSACTION VOLUMES ($B) (Source: RCA)

  2016 2017 2018 2019 Q1 2020
Global 895.3  941.9 1,026 1,045 208.4
Asia Pacific 146.8 163.1 172.5 171.1 24.2
US 421.5 398.6 478.6 487.5 111.3
Germany 65.8 78.9 81.7 89.6 15.8
UK 64.7 77.1 72.8 61.7 12.3
 

He noted a key reason for the difference was the fact that the pandemic originated in China and spread across the region during February, before cropping up in other parts of the world in growing volumes.

“There were so many unknowns at that time. Will it [Covid-19] spread, how far and how fast, and then will it reach Europe and the US?

“We are already seeing deal activity drop off in the US and Europe [in the second quarter],” he added. “It just remains to be seen how far they drop and for how long.”

RCA does not create forecasts, so Green-Morgan declined to predict what volumes could look like across the rest of the year.

Amelie Delaunay, Anrev

RISING DEMAND

Still, given that the coronavirus hit Asia earliest, it’s no surprise that the region’s property transactions were initially the hardest hit, he noted.

Indeed, commercial real estate activity held up much better in Asia than in Europe and in the US during the 2008 global financial crisis, Green-Morgan said. And with Asian economies by and large having contained the virus outbreaks better than nations in Europe or the US, it makes sense for their property markets to hold up better in the second half of 2020.

One factor that should help to support Asian real estate assets is steadily rising demand from Western investors.

Last year the 10 biggest property fund managers globally – including firms such as Blackstone and Brookfield – saw their Asia-Pacific assets under management grow 14% to $88.4 billion, or 6.1% of their total AUM.

US-based Blackstone led the way in Asia, rising to become the biggest manager of unlisted Asian real estate assets as of end-2019, with $19.2 billion, up from $13.3 billion a year earlier. This put it ahead of even the likes of Singapore property giants ARA Asset Management and CapitaLand. And the momentum looks set to continue: just last month Blackstone said it had raised $1.9 billion for a new set of Asia-focused property funds. 

Similarly, large institutional investors like Dutch pension fund manager APG and German insurer Allianz are building their allocations to Asian property. Moreover, Canada’s Ontario Teachers’ Pension Plan is planning to put a property team in the region this year.

If these investors’ pre-pandemic sentiment on Asian real estate holds true, investment flows look set to rebound over the medium term. Some three quarters (77.5%) of institutional investors said they expected to invest more in Asia Pacific in the coming two years, compared with 55.7% saying the same for Europe and the US, according to Anrev’s Investment Intentions survey released in January.

Property services firm CBRE certainly sounded a note of optimism for the remainder of this year. In a report released on June 16, it said: “With most countries in Asia Pacific now either approaching the end of lockdown or already open for business, commercial real estate investors are gradually shifting from asset management and rental abatement to planning market re-entry after the ‘hard stop’ caused by the onset of Covid-19.

“Sentiment is gradually improving, decision-making processes are restarting, and there is a large volume of dry powder waiting to enter the market,” it added, although investors may need to take a more conservative approach.