Concrete Analysis

Property fund surge fuels investment in Asia-Pacific

Record capital for real estate and emergence of trophy assets see transactions in region rise 2 per cent in first half to US$56 billion

PUBLISHED : Tuesday, 25 August, 2015, 11:28pm
UPDATED : Tuesday, 25 August, 2015, 11:28pm

The Asia-Pacific real estate investment market has remained buoyant this year with strong activity seen up to this quarter.

Strong investor appetite was demonstrated by a buoyant fundraising market, a wave of bigger deals and the emergence of trophy assets on the market over the past six months.

While volatile Chinese equities and emerging market currencies have captured recent media headlines, more important for real estate investors are the continuing decline in global interest rates and a pickup in office leasing volumes across the region in the middle of the year.

JLL capital flow research showed regional investment volumes in the first half rose 2 per cent from a year ago to US$56 billion, with Japan and China accounting for half of the amount.

US dollar strength masked activity at the local level which is stronger than the headline growth rate, particularly in Japan, Australia and South Korea, where the greenback is 10 per cent to 20 per cent stronger than a year ago.

Asia-Pacific volumes would have been up almost 10 per cent in the first half, if exchange rates were fixed.

Capital available for fund managers to invest in real estate hit a record US$250 billion, according to second-quarter data from Preqin, as managers of closed-end private real estate funds were able to raise more money through fewer funds in the first half.

The Asia-Pacific is also being targeted by the largest number of opportunistic funds, according to PERE Research & Analytics.

Cross-border investments have been a notable feature, which saw Australia recording almost 50 per cent of all transactions, Japan 40 per cent, China and Singapore 30 to 35 per cent, involving a non-domestic buyer or seller.

Cross-border investors are also setting their sights further and on more asset classes. Most recently, M&G Real Estate, one of the world's largest property investors, bought three retail assets in South Korea in its first retail acquisition in the country.

Another key trend was a rise in portfolio and platform deals, many of them in the retail and hotel sectors. The most notable were an investment in retail projects in mainland China by two of the world's largest pension funds, APG Asset Management of the Netherlands and Canada's Ivanhoe Cambridge, and a three-hotel portfolio deal in Hong Kong.

Chinese investors are now firmly established as a global source of capital; their investments having increased by a further 20 per cent in the first half from the same period last year.

The increase in returns from overseas investments from the yuan's devaluation makes the income component more attractive although the initial purchase price may seem more expensive.

The sell-off in stocks may also prompt Chinese investors to seek safety in other markets and hedge risks.

These factors, together with the government encouraging capital to globalise, are expected to continue to drive Chinese overseas investment in the longer term.

With so much capital available, finding attractive opportunities is difficult while valuations remain high.

The weight of money continues to push yields to new lows across the region, although in some markets they are perceived to be near their bottom in the cycle.

Chinese investors have been very successful in buying in overseas markets, as evidenced by China Investment Corp setting a pricing benchmark in acquiring the Investa Property Trust in Australia and a portfolio of French and Belgian malls.

The search for higher returns and diversification benefits should continue to also drive Asian outbound investment, with the latest example being Singapore-listed Global Logistics Properties buying a large logistics portfolio in the United States.

Riding on ample liquidity and strong investor appetite, direct real estate investment activity in the Asia-Pacific is expected to pick up significantly in the second half and continue into next year.

The markets of many gateway cities should remain active as landmark buildings find new owners. In Hong Kong, another iconic hotel was sold last month.

Major deals are in the pipeline in Australia and in Singapore's prime office sector. In other markets, deals will hinge on whether there is enough physical stock available to meet demand.

Myles Huang is a director of research for Asia-Pacific capital markets at JLL