Institutions steer clear of Asian property after rate hikes
With transaction volumes in Asia’s property market at decade-long lows, asset owners and industry consultants in Asia have told AsianInvestor that the gap in expectations between buyers and sellers shows little sign of closing.
“Unlisted markets still have not moved much: there is an element of price discovery that needs to take place,” said Toby Selman, who leads property investment strategy at the New Zealand Superannuation Fund, adding that price falls and additional transactions in the unlisted property market would make it easier to consider investment opportunities.
Despite significant discounts to net asset value (NAV) in the listed REIT sector, meanwhile, current prices did not always reflect fundamentals, he noted.
“I wouldn’t say they are [fully] repricing: we are seeing discounts to NAV [but] the question is: what is fair NAV?” Selman said, adding that current volatility increased the value of liquidity to NZ Super and that the fund was less attracted to development deals as a result.
Allocation to Asian property markets slumped by 50% in Q1, to $27.2 billion, the lowest level of activity for any quarter in more than a decade, according to the latest APAC Capital Trends, Q1 2023, published by MSCI Real Assets (formerly Real Capital Analytics) on May 5.
PRESSURE ON SELLERS EASES
The collapse in volumes this year has been a function of interest rate headwinds and financing difficulties, according to Pamela Ambler, head of investor intelligence, Asia Pacific, JLL.
“Investors are still reassessing the cost of capital and returns,” she said.
Crucial to the recovery of transactions will be the willingness of buyers and sellers to bridge the current gap in expectations when it comes to prices.
“The current muted investment market is mainly due to the bifurcation of price expectations between buyers and sellers,” said Henry Chin global head of investor thought leadership and head of research, Asia Pacific for CBRE.
But the prospect of an end to interest rate rises is taking the pressure off potential sellers for whom debt servicing costs have risen since last year, reducing the likelihood of the price cuts necessary to get the market moving again.
“The cost of debt has started to trend down to some degree so the chance for the further re-pricing remains slim,” said Ambler.
She pointed to the likely impact of comments by the US Fed at its last meeting on May 3 that it was likely to pause rate hikes for now. “Major Asian central banks will take note.”
Chin agreed that recovering investor confidence, amid wider expectations of stabiliing interest rates across the region, would reduce the speed and scale of price falls.
“This could slow the pace of price correction,” he said.
DELAYED RECOVERY
Meanwhile, interest rates must fall significantly from current levels to spur the market back into action, according to Ambler. JLL’s latest investment sentiment barometer found that 49% of respondents believe that benchmark interest rates will need to fall by between 0.5% and 1% from current levels before investment activity picks up.
Ben Chow, vice president, head of Real Assets Research, Asia for MSCI said the absence of price falls could delay a recovery much longer than many are predicting as it pushes global investors away from the region’s property market for years.
He pointed to the example of Australia in the wake of the GFC, when office values per square foot fell by only 12%, compared with 25% to 30% across Singapore, US and UK, according to MSCI data.
“This meant cross-border investors only returned to Australia towards the end of 2011, whereas they returned to Singapore towards the end of 2009, and were pretty much present throughout most of the downturn for the UK and US,” said Chow.
And buyers from Europe and the US have been slow to return to the market, Chow told AsianInvestor in the middle of May.
“Domestic institutional appetite has begun to pick up, and regional investors (notably from Singapore and Hong Kong) have continued to invest, but global investors from Europe and North America remain noticeably absent,” he said at the time.