Concrete Analysis

Overseas investor interest in Asia-Pacific region on the rise

Overall investment volume this year is expected to remain in line with theUS$98 billion record achieved last year

PUBLISHED : Tuesday, 26 August, 2014, 11:23am
UPDATED : Wednesday, 27 August, 2014, 5:00am

Asia-Pacific investors are becoming less risk-averse and more willing to move up the risk curve. Risk associated with property investment fell during the second quarter of this year, with the DTZ risk multiplier, a gauge of property market risk, now close to its record low before the global financial crisis.

At the same time, the second quarter saw renewed foreign interest in the region, with a record level of overseas investment. Private equity funds and institutional investors were particularly active. This led to buoyant investment activity across most markets, suggesting that the region is now in "risk-on" mode.

Commercial real estate investment (excluding land sales) in the Asia-Pacific region reached US$25.4 billion in the second quarter, up 9 per cent from the first quarter. This took investment volume in the first half to US$48.8 billion, up 3 per cent year on year.

Australia saw a surge in investment - 102 per cent quarter on quarter to US$8.2 billion - in the second quarter and reaching its highest level since the fourth quarter of 2007. This was underpinned by the takeover of Commonwealth Property Office Fund by the Canadian-based CPPIB and Dexus A-reit.

South Korea stands out as a new hot spot in the region, with investment rising to US$2 billion in the second quarter, the highest level in two years. Foreign private equity funds and institutions were most active, attracted by relatively stable market fundamentals and attractive risk pricing characteristics.

The Greater China region, comprising the mainland, Hong Kong and Taiwan, experienced a 66 per cent rise in investment in the second quarter.

Standing investment on the mainland registered 32 per cent quarter-on-quarter growth to US$3 billion. Against the backdrop of slower housing sales and tightened credit, landlords are more inclined to dispose of non-core assets to improve liquidity. This has therefore created a window of opportunity for investors to expand their property portfolios.

After a lull year, transaction activity in Hong Kong rebounded 133 per cent on the quarter to US$2.2 billion, the highest since the first quarter of last year, when the government implemented double stamp duty to curb speculative investment.

However, the rebound cannot be taken as an early signal of market revival. Activity was largely supported by Citigroup's purchase of a large office building to consolidate its operations.

Taiwan recorded a jump of 140 per cent to US$400 million due to strong owner-occupier demand across all major property types.

Volumes in Japan fell 46 per cent to US$6.6 billion in the second quarter, reflecting the normal seasonality in the market following strong activity in the "deal rush" to beat the March fiscal year cut-off. Overall, investment activity in the first half was still 3 per cent higher than for the same period last year.

Investment by non-Asia-Pacific capital soared to a post-crisis high of US$6 billion in the second quarter, accounting for 24 per cent of total investment activity in the region, up from 4 per cent in the first quarter and 8 per cent for the whole of last year. Sales by investors outside the region totalled US$1.2 billion, a net capital inflow of US$4.8 billion.

North American and international capital was most active in the second quarter, committing US$4.7 billion in the region, with European investors committing a further US$1.2 billion. Overseas investors are continuing to take advantage of the market maturity, good liquidity and attractive yield spreads in these markets.

Investment by private equity funds reached US$6.5 billion, up 26 per cent from the first quarter and replacing reits as the largest investor type in the Asia-Pacific region. Before the second quarter, reits had dominated the region's investment market for six consecutive quarters from the fourth quarter of 2012.

The increased activity by private equity reflects successful capital raisings by several large private equity platforms over the past 12 months. The region now has a range of unlisted funds fully primed and seeking investment opportunities to expand their property portfolio in the region.

Renewed interest from overseas investors targeting the region and a larger pool of private equity capital looking for opportunities will support investment activity throughout the rest of the year.

Intensifying competition between domestic and cross-border investors in some markets, such as Australia and South Korea, will maintain downward pressure on yields. Consequently, this will induce more landlords to take the opportunity to recycle assets and realise capital gains, maintaining the upbeat momentum seen in these markets.

Against the backdrop of slower housing sales and drying up of credit on the mainland, the capital market is becoming more balanced between buyers and vendors as the latter are more inclined to dispose of their non-core assets and improve asset turnover. This will continue to allow investors, particularly overseas institutions, to gain exposure in China and achieve their asset-allocation target.

In recent years, the region has seen some significant purchases by corporations for owner-occupation. The emergence of this trend is being driven by cash-rich corporations, more specifically banks and financial institutions, which acquire quality assets for strategic reasons such as office consolidation and achieving cost efficiency. This trend is expected to continue, particularly in markets that are characterised by persistently high rents and low funding costs, such as Taiwan and Hong Kong.

Overall, these trends will continue to support investment market activity over the rest of the year and maintain the momentum evidenced last year. Therefore, overall investment volume this year is expected to be broadly in line with the US$98 billion record achieved last year.

Dennis Fung is the head of Asia-Pacific forecasting at DTZ