Australia may be suffering its first recession in almost three decades, but the economic shock is no obstacle to landmark investment transactions in the commercial property market. On November 18, China Investment Corporation, the country’s sovereign wealth fund, acquired an additional 50 per cent stake in Grosvenor Place, an office tower in Sydney’s central business district, from Dexus, Australia’s largest office landlord, for US$675 million. The deal is not just Australia’s largest office sale this year, it is also the world’s third largest partial office transaction, and ranks among the top 10 office deals in the Asia-Pacific region. What is more, it is a major cross-border transaction at a time when the share of overseas investment in global commercial property deals has fallen sharply due to the fallout from the Covid-19 pandemic, putting pressure on markets, such as Australia, that are more reliant on foreign capital. However, in the Asia-Pacific region, cross-border investment increased by 45 per cent quarter on quarter in the third quarter of this year, driven by an increase in intraregional deals, data from CBRE shows. Indeed, Asia is leading a global recovery in investment activity, with transaction volumes down just 19 per cent in annualised terms last quarter, compared with a 63 per cent plunge in America and Canada, separate data from JLL shows. Asia’s outperformance can be attributed to a confluence of factors – some of them external, others region-specific – that has minimised the impact of the pandemic on the region’s real estate investment markets. Leaving aside Asia’s successful virus containment policies , which have allowed most economies to reopen more quickly, investment markets are being driven by a number of pre-pandemic trends and themes that have become more pronounced since the pathogen struck, providing stability and underpinning demand for property assets. First, higher-yielding real estate was a popular asset class even before government bond yields were driven down further by the unprecedented steps taken by central banks to fight the pandemic. With the global stock of negative-yielding debt having more than doubled since the virus erupted, and the yield on benchmark 10-year US Treasury bonds plummeting to 0.8 per cent, the yield spread between commercial property and “risk-free” bonds is now even more attractive. According to a report published by JLL on November 3, the drop in interest rates last quarter increased the “cash-on-cash” return – a popular metric in property transactions, which calculates the ratio of cash earned to cash invested – on prime office properties in Asia’s main cities. The figure rose to between 3.4 per cent and 3.6 per cent in Hong Kong and Shanghai, almost 5 per cent in Tokyo, and 5.8 per cent in Sydney. Second, ultra-accommodative financial conditions , coupled with banks’ much stronger balance sheets compared with the 2008 financial crisis, has increased the holding power of owners of real estate. Not only does this reduce the scope for sales of distressed assets, it forces investors to bid more aggressively for properties – particularly in the most sought-after sectors, such as logistics and multifamily housing – despite the deterioration in economic and occupier fundamentals. Services arm of China’s most indebted developer launches US$2 billion IPO A report published by property investor AEW earlier this month rightly noted that “few vendors were in a position where they needed to sell below asking price or valuation, and as a result, buyers that were looking for discounts have started to adjust their expectations”. As I argued previously , investors who were hoping for a meaningful virus-induced correction in Asian commercial property have been sorely disappointed. Prime rental yields – which were already at historically low levels before the pandemic struck – have barely budged. Even in the vulnerable retail sector , yields have risen only modestly, while they continue to decline in the logistics and multifamily sectors. Third, one of the reasons there has not been a significant correction is because of the weight of capital targeting Asian real estate. Although transaction volumes so far this year are 30 per cent down on 2019 levels, the last two years were bumper ones, shining a harsh light on this year’s investment tally, which is on a par with 2015-16 levels. More importantly, there has since been a sharp increase in the amount of capital waiting to be deployed across the region, as the collapse in bond yields and the structural drivers of Asia’s property markets accentuate the benefits of greater exposure to the asset class. Stuart Crow, head of capital markets for the Asia-Pacific region at JLL in Singapore, says demand for the region’s property assets “never disappeared in 2020”. Still, the strong appetite for Asian real estate creates its own problems. Not only is there a significant risk that prices become too detached from fundamentals – particularly in the actively traded office market where rents are under severe pressure , notably in Hong Kong, Beijing and Shanghai – there are too many investors chasing too few desirable assets, especially in the popular logistics sector, which suffers from undersupply. Yet, these are the kind of problems which are inconsequential at a time when the global economy is suffering its worst crisis since the Great Depression. Asia’s property investment markets are well insulated against the shock of the pandemic. Nicholas Spiro is a partner at Lauressa Advisory