APG and Korea Post survey post-Covid property landscape
Assets linked to the rise of e-commerce – such as logistics and data centres – may be the hottest property in real estate now, but high-quality traditional holdings in the office and even hospitality spaces are seen as likely to prosper once more as Covid restrictions ease.
Such is the thinking of experienced senior executives from $630 billion Dutch pension fund manager APG and Korea Post’s $80 billion savings arm, as well as some other big institutional investors.
“The most affected real asset sectors [in the pandemic] were obviously hotels and transportation,” Lee Jinho, head of global real assets at Korea Post Savings, told AsianInvestor. “We had some investments in those areas, so we had some setbacks, of course. But with the vaccines and as time goes by, stability will return for these assets.”
Lee went on to explain how the savings unit of the national postal service addressed the impact of one of its hospitality-sector assets and what it has learned from the crisis.
“We were invested in the mezzanine debt of a [US] hotel, and when Covid hit we sat down with the sponsor to work through the crisis,” he said, declining to name the hotel. “As partners, we were open to waiving the loan covenants. We worked together to amend the conditions.
“As times come back to normal, I believe that those assets will perform well again,” Lee added.
"We learned that if the location and quality of an asset, and the quality of the sponsor, are top class, we may have some setbacks when things like Covid emerge but, at the same time, hotel operations will recover faster than with other deals [involving lower quality assets or sponsors].”
Korea Post Savings is looking to double its allocation to real assets mainly via overseas investments, and one approach it is taking is to seek out fund managers with strong insight into how the markets have changed since the virus outbreak.
Meanwhile, APG, which had one of its busiest years of investing into Asian real estate in 2020, also had hospitality assets that were hit by the pandemic.
“We have a hotel platform in India, and the management teams have done an amazing job of keeping people employed and maintaining the business in a very difficult environment,” Graeme Torre, Asia Pacific head of real estate at APG, told AsianInvestor.
Hong Kong-based Torre echoes Lee's positivity on the sector’s prospects but he acknowledged that short-term challenges exist.
“On the hospitality side, I don't think people are going to stop staying in hotels long term," he said, "but now is a good time to look for distressed opportunities in that sector. It’s a sector that will recover."
OPTIMISM ON OFFICES
Another sector that has suffered from Covid and faces uncertainty is that of office buildings. When social restrictions ease up, it is likely that many companies will offer employees more flexibility as to where they work and when.
While most white collar workers are ultimately likely to spend most their time back in offices, changes are expected to be made both to working practices and to buildings themselves.
“We are having a close look at [the office sector],” said Lee. Do we think everyone will be working at home, as they did during lockdown? No.”
New offices built will have more precautions, he added, including sophisticated heating, ventilation and air conditioning systems, and working conditions set to a new standard.
“Again, [in the office segment] it’s about location and quality of assets,” Lee added. “If you stick with the basics you will not be affected that much.”
Moreover, Torre said, “there’s not enough office space in some emerging markets where the work-from-home ethos isn't as readily accepted as elsewhere.”
Other large investors are also confident about the office space sector in Asia. Korea's $700 billion-asset National Pension Service (NPS) and German insurer Allianz last month unveiled a joint S$634 million ($478 million) 50% acquisition of OUE Bayfront, a prime Singapore office building.
GRADUAL REBOUND
Investment activity in the Asia Pacific office sector is starting to recover after a big hit last year, by industry data.
Capital valuations of Asia Pacific office assets fell by 5.9% and regional grade A rents by 4.9% last year, according to real estate group CBRE. That compares to a rise of 1.8% for Asia Pacific logistics properties in the region in 2020.
Even though Asia Pacific office transaction volume rose by 37% in the second half of 2020, “rents [in the region] will remain under pressure throughout 2021”, with vacancy rates having leapt last year (see graph below), said a CBRE report published last week.
The recovery in office leasing demand is expected to become more prominent in the second half of 2021, the property services firm added, supported by the resilient performance of multiple office-occupying industries.
This reflects the fact that while global property prices are expected to remain under pressure this year, Asian assets are returning faster.
Certainly, Torre – like Lee – feels that traditional property sectors will bounce back in the region and elsewhere.
“When we go back to a degree of normality, hotels, retail [property] and offices will all find a new equilibrium,” Torre said. “And if there are no other major shocks, they may well get back to where they were previously."
With the amount of capital that looks set to pour into real estate markets in Asia once Covid restrictions ease, it seems likely that some investors will be targeting hotels and offices, as well as logistics and data centres, in that region at least.