As the Asian real estate market heads into the seventh year of a bull run, investors are playing defensively, looking at core space in the region’s most developed and liquid markets such as Japan and Australia, while shying away from China’s oversupplied secondary cities, an industry survey has found. Tokyo tops a list of 22 Asian cities for investment in the region next year, for the third straight year, while Chinese secondary cities, grouped as one, rank bottom for the second consecutive year, according to an annual report based on surveys and interviews with 343 real estate professionals by the Urban Land Institute and PwC. Japan’s status is reinforced by Osaka’s continuing popularity, moving up to fourth from fifth in the previous survey, while Sydney’s ranking of second and third-placed Melbourne were evidence of the quest for asset quality and yield by investors, many of whom were now coming from China, a report on the survey, released on Thursday, said. Investors continue to be skittish about assets in China Survey report Hong Kong has languished in the survey’s ranking since 2011, but managed to improve from 21st to 15th this time, reflecting investors’ growing interest in the city. But an uptick in pessimism about the local economy and real estate market outside the central office sector has constrained its performance. “Investors continue to be skittish about assets in China, with concern centred on an array of issues ranging from a soft economy, a depreciating currency, oversupply, high values and compressed cap rates,” the report said. “Shanghai is a shelter in the storm, however – its middling performance in our survey reflects its status as China’s only true gateway city, where prime assets will always be in demand.” Shanghai’s ranking fell to 9th from 6th. It ranked top in 2008 and 2010 and second in 2007 and from 2011 to 2014. “There are still some transactions happening in the market,” said KK So, PwC’s Asia-Pacific real estate tax leader: “I think people are just waiting for the right opportunities.” Benjamin Cha, Asia-Pacific chief executive of British property firm Grosvenor, said at a separate briefing on Thursday that it would add US$1.35 billion of investment in the region over the next three to five years, but he was eyeing only three cities – Shanghai, Hong Kong and Tokyo. The report Urban Land Institute and PwC report also pointed out that some investors were worried the momentum in Japan might slow soon as returns on investment might decline. Many deals have been underwritten on the basis of rosy projected returns. Japanese banks offer leverage as high as 90 per cent at very low interest rates for investors to complete the transactions, which has helped generate handsome returns so far. Once that sours and the Japanese government fails to deliver its promised economic growth, refinancing risk will loom in 2018 when many of these loans come due, the report cited an unnamed investor as saying.