How the coronavirus pandemic pushed property investors to look beyond grade A office space

While the pandemic has increased demand for core assets – low-risk, low-return properties in liquid markets – the scope of ‘core’ is broadening to include new asset categories, such as logistics, multifamily housing and data centres

Nicholas Spiro

Published: 10:00pm, 18 Jan 2021

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For an indication of the degree to which institutional investors remain bullish on the prospects for Asia’s real estate markets despite the damage wrought by Covid-19, look no further than the findings of a survey published on January 13 by the Asian Association for Investors in Non-Listed Real Estate Vehicles and its European and US counterparts.

The poll, which is carried out annually, revealed that 72 per cent of respondents planned to raise their allocations to Asian property in the next two years, compared with 57 per cent and 51 per cent for Europe and the US respectively. Indeed, global investors expect to have a higher exposure to Asia than Asian investors themselves.

However, the survey also found that the pandemic had made investors more cautious. Respondents favoured core investments – low-risk, low-return properties in liquid markets, notably those with long-term leases to creditworthy tenants and grade A office buildings in prime locations – over value-add or opportunistic ones, which generate higher returns but require repositioning or ground-up development to realise their potential.

This is why Sydney, Melbourne and Tokyo – which are among the most established and transparent real estate markets in Asia – were respondents’ top investment destinations, and why the widely traded office sector was their preferred asset class.

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The results of the survey also underscored the undimmed appetite for Asian property. While investment volumes across the region were down 28 per cent year-on-year in the first three quarters of last year, the share of cross-border transactions even rose in Japan and Australia, data from JLL shows.

Not only have sales of distressed assets been few and far between since the virus struck – mainly because of ultra-low interest rates, low leverage ratios and relationship-driven bank lending – rental yields, which were low to start with in many markets, have declined further in some sectors because of the huge weight of money targeting Asian real estate.

A report published by CBRE earlier this month noted that average yields on prime logistics assets (the most popular properties due to the pandemic-induced acceleration of e-commerce) have fallen to less than 1 per cent above those on offices. Nearly a quarter of investors questioned were willing to bid above the asking price to secure high-quality warehouses in Asia.

The problem, however, is that there is a huge undersupply of such facilities across the region, which is driving prices up further. Even in the much more liquid office sector, there is a limited availability of premium buildings, especially in markets like Singapore where assets are tightly held.

Employees work at a warehouse of Cainiao, Alibaba’s logistics unit in Wuxi, Jiangsu province, China, in October 2020, ahead of the company’s Singles’ Day shopping festival. Photo: Reuters

For buyers seeking core investments that provide security of income, but who face challenges in accessing high-quality properties due to an abundance of capital chasing a dearth of desirable assets, varied and bold investment strategies are critical.

“Core assets remain fully priced. We take advantage of individual country and sector cycles to build a diversified portfolio of income-producing assets,” says Danny Phuan, the Singapore-based head of acquisitions for Asia-Pacific at Allianz Real Estate, one of the most acquisitive investors in the region.

The property arm of German insurer Allianz is leaving no stone unturned. While it focuses on core investments, it deploys capital across the risk spectrum, investing in both advanced and emerging markets in Asia. It is also willing to assume development risk to create new income-generating properties through a “build-to-core strategy”.

Moreover, the investor’s transactions last year – which include a portfolio of multifamily residential assets in Tokyo and a 50 per cent stake in a group of Australian logistics facilities built by German supermarket chain Aldi – are long-term bets on key macroeconomic trends in the region, many of which have been turbocharged by the pandemic.

A row of newly built apartment blocks is seen in the suburb of Epping, Sydney, in February 2019. Multifamily housing is an asset category that is attracting investor interest. Photo: Reuters

One of these trends, as I argued previously, is the surge in demand for data centres, which power all kinds of online products and services, fuelled by the cloud computing boom.

Offering significantly higher yields than other property sectors, and seen as an increasingly defensive asset with stable cash flows, data centres are an attractive proposition for large institutional buyers that have considerable experience investing in infrastructure.

Another trend is multifamily housing. While the institutional investment market for rental apartments in Asia is still in its infancy outside Japan, the drivers of the sector – urbanisation, higher levels of occupancy and rent collection during downturns and unaffordable housing in many gateway cities – have contributed to a flurry of deals, with growing interest in Australia and China.

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For investors, the key factor underpinning these bullish bets is the opportunity to tap into resilient and sustainable income streams, particularly at a time when offices are suffering a pandemic-induced identity crisis.

As investors seek new higher-yielding defensive assets as part of a repositioning of their portfolios, big wagers on long-term trends in Asia are helping redraw the boundaries of core real estate. The most popular investments right now are those based on “high-conviction thematic strategies”, says Tim Graham, head of capital strategies for Asia-Pacific at JLL in Singapore.

So far, these big bets are paying off. Yet, the more popular they become, the fiercer the competition and the pricier Asia’s property markets become. Investors may soon need to rethink their strategies once again.

Nicholas Spiro is a partner at Lauressa Advisory

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