Property markets in Hong Kong and Singapore are overpriced, argues Mark Gabbay, co-chief executive for Asia Pacific at LaSalle Investment Management, which is avoiding the two locations.

They normally up 10-15% of LaSalle’s $5.5 billion in real estate holdings in Asia. Now that figure is almost zero.

“I just don’t think we’re going to get the returns,” Gabbay said. “They are very cyclical markets.”

Only if the two markets soften significantly would an entry point for institutional investors emerge, he added. That may happen within a year to 18 months if sentiment continues to deteriorate, Gabbay noted.

Because valuations are at a peak, office and mall projects offer low yields in the two cities. That leaves the firm focused on pockets of niche investments elsewhere in the region.

LaSalle has entered the residential housing market in Australia with four investments in Sydney, and is scouting for deals in Korea.

Housing demand in Australia is driven by young couples looking to get on the property ladder, as well as other domestic and overseas investors.

But obtaining construction permits and finding sites are problematic in Sydney, where there is a supply/demand imbalance for homes valued at A$750,000 ($695,000) and below.

“At some point land prices will move up, which will put pressure on margins,” Gabbay said. “It’s a window that’s going to close.”

Chinese investment in Australia – both by individuals and developers such as the Greenland Group – seems to be the result of cyclical demand driven by policies in China, Gabbay added.

In Australia, LaSalle focuses on the domestic market, seeking returns of around 20% for development projects, the riskiest of the property sectors.

“You could probably sell the majority of your project overseas if you wanted to,” Gabbay said. “We continue to target a balanced group of buyers.”

Institutional investors seeking exposure to Asian real estate favour targeted funds devoted to specific markets and classes of property, rather than the pan-Asian funds that were prevalent before the global financial crisis, he said.

LaSalle is also looking at warehouse projects in Japan. “Abenomics is working,” Gabbay said.

The firm closed its LaSalle Japan Logistics Fund III, which is devoted to warehouse and logistics projects in Japan in mid-2013, with ¥40.8 billion ($431 million) in assets. The club-style fund was formed by a small group of investors led by Dutch pension fund APG. Like its predecessors, Fund III focuses strictly on the Greater Tokyo Area and the Greater Osaka Area.

The company had by October last year sold the bulk of the assets in its Japan Logistics Fund II, which was closed to new investment in 2007. They were sold through a sealed-envelope bidding process to a consortium of buyers led by Japanese banks.

LaSalle started investing in warehouse spaces in Japan in 2004 with its first dedicated warehouse fund for the country.

In China, the firm pursues opportunistic investments, which now comprise 20-30% of its assets in Asia. It is looking to develop its logistics operations or buy income-producing assets from owners that need liquidity, now that credit has become harder to secure.

Developing real estate in China involves negotiating with local governments, which have not released much land for warehouse use because it produces less income for local authorities than mixed-use or residential projects.

Turning to other emerging markets, Gabbay said Indonesia and the Philippines are difficult to operate in. Liquidity is low in such emerging markets, and rule of law is a concern, he added.

“There’s no question that emerging markets are going to grow, and probably at higher rates than some of these other markets,” Gabbay said. “But as an investor, it comes to the risk/return equation. It’s not clear to me that you are going to get paid for taking that risk.”

Still, as more money is put to work in Asia, He believes the stock of institutional investment-grade buildings will increase.