Rising prices and deteriorating yields across high quality real estate across the world is forcing Asian investors to move up the risk curve and become more resourceful about where they can find value.

Increasingly, they are turning to assets in retail and logistics, embracing distressed properties, and becoming prepared to take some responsibility for refurbishment as they seek to increase their investment returns.

Price discounts to some retail real estate assets after a year of reduced business activity, courtesy of Covid-19, has been attracting some asset owners in the region. Troy Rieck, the chief investment officer of LGIA Super in Brisbane, noted that some of his fund's retail assets have seen drops of between 15% and 25%. Yet despite this, he has no plans to sell.

Troy Rieck, LGIA Super

“At those prices maybe we should be buying,” he told AsianInvestor.

Retail Reits in Asia Pacific increased by 6% in the year to March 31, according to property advisory firm JLL. And rival CBRE predicts direct investor flows will increase by 20% into Asia Pacific retail and hospitality assets this year.

Rieck said he was also preparing to take advantage of high prices in the logistics and related sectors to sell assets already owned by the fund. “We are exploring the sale at the right price, we’re happy to allocate elsewhere in portfolio,” he said.

APG Asset Management, the investing arm of Dutch pension fund APG, is similarly interested. In January, Graeme Torre, managing director of APG Asset Management, told AsianInvestor “we are looking for the partner that can present a formula for reinventing retail where that is needed”.

The company has built its Asian real estate allocation in recent years, as has its team, which now stands at 15. Torre added in January that APG was also looking for distressed opportunities in hospitality in the region so its hotel brands could enter the market at a better entry price.

DISTRESSED ASSET SEARCH

Property advisers and fund managers say opportunistic and distressed assets are generally gaining more demand, with the proportion of investors enquiring about such strategies over the past 18 months having increased from one in 10 to one in four.

“Institutions are worried about pricing; they see increased opportunities for higher risk such as opportunistic strategies,” Joseph Lee, co-chief executive and president of Seoul-based Igis Asset Management, told AsianInvestor.

Joseph Lee,
Igis Asset Management

He said he was searching for ‘fixer-upper’ projects such as second-hand buildings in prime Seoul locations. His firm is looking to purchase such property at a rental yield of 5.5% to 6% and then renovate it, converting the lower floors into retail and convenience stores before selling the building at a yield of 4%, which drops as the price of the properties rises. 

Doing so would bring the yield of such properties in line with the broader market for the Korean capital. According to Real Capital Analytics, office yields in the Korean capital over the 12 months to March 31 dropped from 4.5% to 4%.

“Korean domestic investors are moving up the risk curve,” agreed Henry Chin, head of research for Asia Pacific of CBRE.

He said investors have begun looking away from Seoul’s three central business districts. Instead, they are focusing on technology business clusters in places like Phangyu, to Seoul’s south, where sale and lease back deals have become popular. CBRE declined to estimate what yields are available in such locations.

The embrace of risk is expanding well beyond Korea. According to CBRE’s January 2021 Asia Pacific Investor Intentions Survey, the proportion of Asian investors looking for distressed or opportunistic opportunities is at its highest since 2016, at 29%. This is part of a global trend; the property consultant’s Americas Investor Intentions Survey 2021, published in April, noted that the proportion of investors seeking the same assets stands at the same level in the Americas, an all-time high.

In addition, 72% of respondents said they were actively pursuing investment in one or more alternatives sector, up from 54% in 2020.

TARGETING TIER 2 

Investors are seeking to go a little off the beaten track in China, too.

Kelvin Wong, head of China real estate at Schroder Pamfleet in Hong Kong, said he is searching out higher yielding office opportunities away from Shanghai’s central office districts, which he feels are 5% to 10 % overpriced. He has begun focusing on business parks away from the city’s centre, where a mixture of technology and media, life science and pharmaceutical companies are basing themselves.

They tend to be fairly secure tenants and the business parks have seen small rent increases. That contrasts with both rental and sales valuations in Shanghai’s prime office locations, both of which fell 6% in the year to March 31, according to JLL’s quarterly Office Overview report. 

“Downsizing – with tenants in the financial sector surrendering spaces - and oversupply has made it harder to identify opportunities,” Wong told AsianInvestor.

The rental yields in Shanghai’s prime office locations now stand at 5.5% according to Tim Graham, head of Asia Pacific capital strategies at JLL in Singapore, whereas those at the city's periphery, where many of business parks popular with TMT, life science and pharmaceutical tenants are located, are around 5.7%.

Stuart Mercier, Brookfield

“Cost conscious corporate companies are finding their way to high quality projects outside the CBD. It is only happening now in China because prices have reached a level in the CBD where corporates have been driven out and new, high quality products, meet their needs in the fringes,” said Stuart Mercier, head of real estate for Asia at Brookfield Asset Management.

HONG KONG UPGRADES

Allan Lee, head of Asia ex-China real estate at Schroder Pamfleet, is pursuing a similar strategy in Hong Kong.

He told AsianInvestor he is focusing on opportunities in logistics and retail sectors in the city, targeting low yielding buildings that generate yields of around 3%. His fund will hold the assets and increase their yields by gradually increasing them and raising rents to increase their annual yield over three to five years, before finally selling the properties on at a yield of close to 4%.

Lee said he is particularly looking to upgrade outdated warehouses to serve as cold storage facilities or to fit state of the art logistics facilities for e-commerce tenants. Retail projects involve identifying under-rented non-discretionary retail buildings, renovating them and seeking new tenants, to take advantage of people’s reliance on local convenience stores.

“The pandemic is here to stay; consumer and enterprise habits are changing,” Lee said. 

Logistics assets are certainly gaining popularity with investors; at the beginning of 2018 the property sub-set’s average yield spread was 120 basis points (bp) wider than office assets in Asia Pacific, according to CBRE. But the third quarter of 2020 this had narrowed to 90bp.

While logistics assets are generally enjoying good demand, some fund managers are less convinced by the appeal of retail real estate. 

“We continue to actively look at new opportunities on resilient sectors such as logistics and residential while we are being more cautious with segments that have been hit harder with the pandemic such as retail,” Danny Phuan, head of Asia Pacific acquisitions at Allianz Real Estate, told AsianInvestor.