The real estate market in the Asia Pacific region is set to ride macroeconomic tailwinds, despite the challenges posed by Covid-19, and offices and data centres are where investors can potentially find value.

Louise Kavanagh

The pandemic will continue to overshadow the real estate sector in the near term, however, we are seeing real estate investment volumes already getting stronger. The sector outlook is positive as regional central banks maintain a supportive monetary environment and vaccination rates climb, said Louise Kavanagh, chief investment officer and head of funds management for Asia Pacific at Nuveen.

Asia Pacific commercial real estate investment volume totaled $26 billion in the first quarter of 2021, representing an increase of 10% year-on-year. Investment sentiment continued to strengthen over the period, with higher enquiry levels seen in most markets, according to property consultancy firm CBRE.

Interest rates in Apac have been falling sharply in the years leading up to the health crisis, and with central banks' emergency moves last year, most regional economies have policy rates now sitting at all-time lows, Kavanagh said.

“Whilst having created an exceptionally conductive backdrop for liquidity and set a strong basis for valuation, current low rates have yet to be fully reflected in property yields”, she said.

To be specific, bond yields in Australia, Singapore and Hong Kong have retraced 70 basis points year-to-date alone, but borrowing costs in these markets have not followed through and remained to be 60-125 basis points lower than 2018 levels. The Reserve Bank of Australia also indicated in April that it would commit to the current cash rate until inflation is sustainably within the target range.

On the other hand, vaccination rates are picking up even though the pace varies across the region. “The recent acceleration of vaccinations in parts of Asia could reduce the risk of setbacks to economic recoveries and public finances associated with further waves of the Covid-19 pandemic, provided that it is sustained”, Fitch Ratings said on June 8.

China’s real estate market is more upbeat as the country is the largest economic center for growth in the region. Its GDP surged 18% year-on-year in the first three months of 2021, the strongest quarterly figure available since 1992. Albeit off a low base, it is nonetheless a landmark indication that economic activities in China have returned to pre-pandemic levels.

OFFICES TO EVOLVE

While the pandemic has taken a toll on commercial property, there are some interesting trends that investors should not overlook.

“You read the headlines that office is on a decline. But it's over simplistic to say that office is dead. Office will need to evolve. Office users are seeing the built environment as investments in attracting and retaining the best talent, improving employee wellbeing and productivity,” Kavanagh said.

“You'll see tenants wanting to upgrade the quality, or the user experience in their office environment. They'll look at office space as a collaborative environment; one that reflects their corporate culture,” she said.

This is already happening across major cities in the region. There’ll be a flight to quality, and obsolescence in some of the B-grade or decentralised office locations will likely occur, she said.

While employees will be able to choose between working remotely or at the office, more than 70% of managers would prefer to have office-based staff, according to the Asia Pacific The Future of the Office Survey conducted by CBRE Research in October 2020.

Several companies completed major flight-to-quality relocations and expansions in the first quarter, including Huawei, which leased space in Raffles City The Bund in Shanghai, and LG Energy Solutions moving to Parc One Tower 1 in Seoul, according to CBRE.

DATA CENTRES

On the other hand, even though data centres are generating higher interest among investors, the lack of investable stock is hampering efforts by investors to enter this asset class.

There is growing capital interest in places such as Hong Kong, Singapore, Tokyo, tier-one cities in China and Sydney to purchase data centers. Global mobile traffic is predicted to expand by 31% per annum until 2025. Acceleration of Internet of Things will only increase the need for data centres.

That said, data centers accounted for just 1.5% of total Asia Pacific real estate investment volume between 2015 and 2019 due to the lack of investable stock, Kavanagh said.

“It is highly likely that you will see good performance of data centers here in Asia Pacific. But first it has to become an investable asset class; meaning that investors can actually buy it,” she said. Data centres have been one of the best performing real estate asset classes in the US.

Deeper capital market pools and liquidity, more sophisticated valuation and pricing principles will also need to be established first for the asset class to become more mainstream in Asia, she said. Nuveen is helping to advance the trend with its data center investment specialist in the region.

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