As many government support programs come to an end in 2021, the commercial real estate market is expected to enter a “new dynamic” in which most investors anticipate significant amounts of stressed or distressed assets to be released, according to a survey by PwC and the Urban Land Institute.
In Asia-Pacific, government funding to support local economies put commercial real estate transactions on hold as asset owners had yet to feel the pressure to sell and buyers were taking a wait-and-see attitude, the survey, Emerging Trends in Real Estate Asia-Pacific 2021, said.
However, a real estate analyst quoted in the paper suggested that distress selling will come in 2021 as more corporates experience liquidity issues. The survey indicated that more investors are looking for opportunistic returns in the region in 2021 – 24 percent of respondents will be seeking 15-20 percent returns, compared with only 10 percent of respondents this year.
The report also identified China, India and Australia as the Asia-Pacific markets most likely to see potential distressed or stressed sales.
China
As the government continues to tighten bank financing both large and small developers are looking to sell assets to meet debt obligations or to fund new land acquisitions. An investor quoted in the survey said the country’s residential sector is most vulnerable to distress selling as oversupply has surfaced in some areas. However, as the demand for residential assets remained strong during the “Golden Week” in October, the report said residential developers can avoid a credit shortage if they are willing to discount prices.
India
The impact of the pandemic has added another layer of stress to the country’s developers on top of the 2019 crackdown of developer-finance irregularities. A local consultant quoted in the report said around 95 percent of Indian developers are facing potential cash and liquidity shortages. Apart from foreign investors’ go-to business park assets, the country’s residential sector is also offering attractive opportunities in last-mile construction funding on a senior-secured basis for mid-range housing projects, which have return targets as high as 23 percent.
Australia
As one of the most transparent real estate markets in the region, Australia has always attracted Western institutional capital due to the similarities in their economic structures. The report indicated there will be further rental declines across property sectors as unemployment worsens and support provided by government policy measures falls away in 2021. With that in mind, an analyst quoted in the report expected there to be “more pressure on landlords to be realistic in valuing their assets.”
However, investors expect price adjustments in the region to be more modest than in the US and Europe as the region has been more successful in containing the pandemic, in addition to the low leverage ratio regionally and low interest rates globally.
“It’s all about the economy. We don’t want it to collapse, but also we don’t want the property bubbles to continue. I feel like a mini-adjustment is good, a 10-15 percent adjustment is healthy enough to reset. If we get that, we don’t need it to be 30, 40, 50 percent,” said one Asia-focused analyst.
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