This article is sponsored by GoHigh Capital • AEW • Greenberg Traurig • LaSalle Investment Management
The covid-19 pandemic might still be ongoing, but it is not holding back the Asia-Pacific real estate market, which is seeing continued capital raising and rocketing transaction volumes. Sectors driven by the ‘new economy’ are booming. But investors have not abandoned the office sector. Even retail is getting selective interest. The PERE 2021 Asia roundtable found broad optimism with experts around the region, tempered with caution and a desire to invest far more specifically in districts and sub-sectors.
Even though the pandemic continues to subdue most markets in Asia-Pacific, the International Monetary Fund is predicting 6.5 percent GDP growth for 2021, compared with global growth of 5.9 percent. China provides the region’s momentum, with 8 percent GDP growth forecast for 2021.
Data from Real Capital Analytics shows transaction volumes for the 12 months to Q3 2021 coming in at $193.9 billion, the highest level for nearly a decade. Transaction volumes for the first three quarters of this year totaled more than $137 billion, higher than for the same period in 2020, but also higher than 2019. PERE research shows fundraising for Asia-Pacific real estate funds rose slightly to $17.49 billion in 2020, compared with $17.3 billion in 2019. So far, 2021 is tracking slightly behind both years. However, a strong final quarter would lead to similar performance.
“Broadly speaking, it has been a very good year for fundraising for private equity real estate,” says Claire Tang, Asia-Pacific co-chief investment officer and head of Greater China at Chicago-based manager LaSalle Investment Management. “We closed our first fund dedicated to the China logistics sector in October and had a first close for the latest in our Pan-Asia opportunistic series. There has been significant interest in Asia because of how [the region] has appeared to outperform other markets.
“Some investors had initially wanted to delay their commitments last year, because they wanted to come out and physically see the assets. However, now most have become comfortable with virtual roadshows and virtual due diligence.”
The pandemic initially caused some investors to become more risk-averse, says Tanya Do, portfolio manager for Boston-headquartered manager AEW’s Asia-Pacific core strategy. “At the start of the pandemic, there was a shift to yield and more preference for secure, long-term income,” she says. “But, as the pandemic has moved along, we are seeing investors showing more risk tolerance. This is demonstrated by the amount of opportunistic funds which closed in the last year or so.”
At present, AEW is seeing “a lot of strong interest from European investors into Asia-Pacific” but some caution from US investors because they are “more touch-and-feel investors, and the travel restrictions have hampered their investment here. Also, there have been a lot of opportunities in the US for them over the past 18 months. However, we do expect them to come back within the next few years as borders open,” says Do.
Generally, lack of capital is not a problem for investors and managers. A lack of deals might be. Joel Rothstein, chair of law firm Greenberg Traurig’s Asia-Pacific real estate practice, says: “For investors into Asia with abundant dry powder and ambitions to expand, the biggest challenge is finding deals and being able to deploy capital. Many key markets are relatively competitive, and it’s not only competition from other foreign investors, but there’s competition from domestic players as well.
“For an international, cross-border investor, having an established and experienced team on the ground is important for accessing and executing deals, especially so during covid-19, with people unable to travel.”
A fundamental shift
The big news in Asia-Pacific real estate in recent months has been the travails of Chinese residential developer Evergrande, which is hugely indebted and has defaulted on a number of interest payments. Other large Chinese developers are also heavily indebted, following the Chinese government’s crackdown on developers’ ability to raise debt.
Josh Zhou, co-founder and managing partner at Beijing-based manager GoHigh Capital, says: “It is a tough time for the whole residential development sector. Transactions in the secondary market dropped significantly in the past month: around 80 percent in Shenzhen, 30 percent in Shanghai and 30 percent in Beijing.
“However, some people are arguing it is a Lehman moment for China. But it is obviously not. Much of the pressure on developers has come from the three red line policies, which restrict debt. The government is looking for stability in the housing market. But it doesn’t want a crash and has the levers to prevent one. However, in the medium term, it will be tough for developers.”
Cold storage in high demand
It is becoming a popular investment niche with Asia-Pacific real estate investors due to demand for fresh food from a growing middle class
Claire Tang, Asia-Pacific co-CIO and head of Greater China at LaSalle Investment Management, says: “We have high conviction that cold storage logistics will continue to generate strong demand across Asia-Pacific, due to the strong growth seen in the fresh food and pharmaceuticals businesses. Cold storage currently accounts for approximately 10-15 percent of our logistics portfolio.
“We are able to generate better yields and eliminate some of the competition because of the specialist expertise required to build, lease and operate cold storage. We are seeing an attractive yield spread between cold and dry logistics across the region.”
Tanya Do, portfolio manager for AEW’s Asia-Pacific core strategy, says: “We really like cold storage; AEW is one of the largest investors in the sector in the US. We are looking closely at it in Asia and recently acquired a cold storage logistics facility in Australia. There is huge potential in Asia; we need another 400 million cubic meters to match existing US supply per head. There is a yield premium but that is tightening.”
The rest of the panel was similarly skeptical that China might be facing a “Lehman moment.” However, Tang notes: “There appears to be some push towards a fundamental shift in the China residential sector: first of all, there will be clear differentiation between the strong and weak credit developers, not just by lenders but also buyers. From a policymaker’s perspective, the objective is to push developers to move away from over-leveraging their balance sheets. Slowly, that will shift toward using more equity to finance their projects over time, which I think is very positive.”
Zhou argues this will be positive for overseas investors in China. “Investors in China real estate should be happy because there will be more and more opportunities,” he says. “Developers in difficulties may be forced to sell cheaply to de-leverage. Trapped assets should be a very important investment strategy.”
The popularity of multifamily
The Chinese government might want to calm a debt-fueled boom in the for-sale residential market. However, it is also seeking to encourage investment in professionally managed rental residential. This ties into a popular global theme for real estate investors, which have seen a steady performance from multifamily residential during the GFC and covid-19 downswings.
Tang says: “The government has been supportive of the development of the multifamily sector. Recently there’s been a lot of policies to incentivize multifamily re-developments or conversions, including expedited entitlement process for conversion projects and reduction of property tax for the sector. We have seen a strong pipeline of assets that are distressed hotels or retail which can be potentially converted into multifamily.”
Rothstein adds: “Several of our cross-border investor clients have firmly set their sights on rental residential deals. These investors recognize the pathway to opportunity and success in China is to invest with and be in promotion of governmental policies.”
An important measure of government support for multifamily in China will be its inclusion in the sectors allowed for a Chinese real estate investment trust, says Zhou. “The government wants to improve the supply of housing for people to live in, not speculation, so is encouraging rental housing, especially affordable rental housing, which the regulators have said will be allowed to be in a C-REIT and I think the first batch will be launched next year. This will be a very active sector in the future.”
While China offers potentially huge opportunities in the multifamily residential sector, in Asia-Pacific the main focus of investor interest has been Japan, with $3.71 billion of acquisitions there in 2020, according to Real Capital Analytics. Investors including AEW, which made its first purchases earlier this year, Allianz, AXA Investment Managers, Blackstone, Nuveen, PGIM and Savills Investment Management have all targeted the sector.
Multifamily is a popular sector, but logistics remains the sector of choice for global investors. PERE data shows two of the largest Asia-Pacific funds in market, ESR China Development Platform and GLP China Logistics Fund III, targeting $4 billion and $2 billion respectively, are China logistics focused. Meanwhile, there are more Asia-Pacific logistics funds in market than any other single sector.
Tang says: “We are seeing a lot more capital flow into logistics globally as the sector continues to be underpinned by strong fundamentals. Investors globally are looking to increase their allocation to logistics. Just taking LaSalle as an example, logistics now makes up approximately 50 percent of our Asia-Pacific AUM, compared to 28 percent five years ago.”
AEW’s Do adds: “Logistics is a continuing theme with investors; there’s a big preference to deploy into logistics and we agree with it. The sector will continue to grow due to structural tailwinds. Investors are looking at alternative asset classes which are linked to consumer demand, such as rental residential, logistics, data centers and cold storage.”
Logistics dominated the major deals in the Asia-Pacific region this year. Both Do and Tang chose ESR and GIC’s purchase of a A$3.8 billion ($3 billion; €2.4 billion) Australian logistics portfolio from Blackstone as the most significant deal in the region so far this year, both for its scale and its effect on pricing for logistics. Do says: “I think there’s definitely a structural change in real estate; we’ve seen logistics yields in Australia, for instance, going below retail. I don’t see it going back the other way. Logistics is different in the sense that you’ve got long-term income, you’ve got rental growth that’s underpinning that cap rate as well.”
JLL data shows a continued convergence between real estate sector yields in markets across the region, driven primarily by lower yields for logistics assets but also by rising retail yields. In a number of major markets around the region, industrial and logistics yields have compressed by around 200 basis points over the past decade. In Sydney, industrial yields are now lower than both office and retail yields.
Rothstein, meanwhile, highlights ESR’s acquisition of ARA Investment Management, which has created the largest real estate investment manager in Asia-Pacific and the world’s third largest, with $131 billion of assets under management. “This deal shows Asia has truly come of age in terms of being a center for real estate private equity and fund management,” he says. “The deal is also interesting because the combined company is firmly focused on new technology industries from logistics facilities to data centers – pointing to the future direction of the industry.”
New economy sectors
Indeed, sectors linked to the digital economy are proving popular with investors in Asia-Pacific, not least because they provide an opportunity to add value. Rothstein says: “Right now, new economy assets are the hot commodity. We are continuing to see strong interest in logistics facilities, cold storage facilities, data centers and even life sciences. There are areas where you need specialized management and operational expertise which a local developer might not have.”
Do also cited life sciences as a sector with strong potential in Asia. “There’s growth potential as well for life sciences. Because if you look at Asia-Pacific, we’ve got 60 percent of the world’s population, but only account for 6 percent of world spending on healthcare. So there’s a lot of growth potential for such tenants. We need to spend a lot more on R&D and healthcare services and products.”
However, Zhou sounds a cautious note on life sciences, saying: “The life sciences business park sector is very interesting. But my concern is that it may not be that big, and limited to certain markets. So in China, for example, you might only look at Beijing, Shanghai and Shenzhen. In lower-tier cities you ought to be very concerned about supply.”
While new economy sectors are getting a lot of attention, the roundtable remains optimistic about the outlook for the office sector and even retail with the proviso that, in both sectors, investors need to consider very specifically the areas in which they invest. Investors also need to consider the specific occupiers an office building will appeal to and the type of shopper a retail asset might serve.
Zhou says: “We see a lot of success for the office sector, but in particular locations where there is a clear tenant profile. We have projects in Beijing which are leasing fast and at high rents, which you might not expect.
“However, the office market is still there as long as you focus on serving the technology sector, e-commerce and, in China, domestic financial institutions. The market is differentiated and makes local knowledge even more important.”
Tang adds: “We are of the view that there will be divergence in terms of performance of office space across different cities, different markets and different sub-markets. There are certain office sub-markets which have performed well despite covid, underpinned by strong demand from tenants in TMT, healthcare and certain financial sectors.”
ESG comes into focus
Governments and real estate investors around the Asia-Pacific region are increasingly focused on ESG matters, with the region’s developed markets leading the way and global investors demanding the same standards as they do elsewhere.
Tanya Do, portfolio manager for AEW’s Asia-Pacific core strategy, says: “In this region, Australia is ahead in terms of environmental sustainability in real estate and I think Japan’s always been ahead of the curve, as ESG is factored into their investment process naturally and culturally.”
Claire Tang, Asia-Pacific co-CIO and head of Greater China at LaSalle Investment Management, says: “As one of the larger global GPs, we have the responsibility to lead by example by pioneering certain ESG standards in the region.”
China might not have attended COP26, but the government is driving ESG provisions, says Josh Zhou, co-founder and managing partner at GoHigh Capital. “In China, the top officials make it very clear that ESG is very, very important and it is the social aspect, common prosperity, as well as carbon control,” he says. “You need to think how to make the communities benefit from your products. From an investment perspective, you can see that the affordable rental housing could be an ESG investment.”
A major difference between Asia-Pacific and Western office markets is that homeworking has not taken off to the same degree. “In China, people live in small homes, often with large families, so working from home is not practical,” Zhou says. “Furthermore, major employers such as SOEs and tech firms require their employees to come to the office for collaboration and teamwork.”
Do adds: “Also, Asia-Pacific governments have spent a lot of money on infrastructure, so connectivity and public transport means we don’t have lengthy commutes, like in the US, for example.”
More and more investors are beginning to look at retail, which is becoming a useful income play in many markets. However, once more the panel advises a tight focus. “There are little pockets of retail which look good, especially with the yields now being above logistics, so we’ve seen a lot of investors inquiring more about retail,” says Do. “We will look at it, but very selectively: purely non-discretionary neighborhood centers.”
In China, adds Zhou, “you can buy retail cheap, because there is no liquidity because of over-supply and liquidity concerns, although you may have to move into restructuring and renovation in order to maximize long-term value. In the medium to long term, retail is another sector where we might see C-REITs allowed, but maybe in three to five years. In the medium term, I’m still optimistic, but you should be very selective about retail assets.”
Tang notes: “While fundamentals in certain markets are still strong, the exit pool and liquidity for retail do not appear to be the same as before.”
The hospitality comeback
The hospitality sector has been ravaged by covid-19 and 18 months of restrictions on travel, but widespread distress has yet to emerge. “We are watching the hospitality sector with interest, to capitalize on potential dislocation,” says Tang. “However, we have seen very limited distress in the more liquid markets in Asia.”
Rothstein says: “Recently we have seen a resurgence of interest in hotels, especially in countries where there is a strong domestic tourism market. In Japan, for example, it’s tough to book a hotel for a weekend stay at the moment in better-quality hotels in desirable locations because no one can holiday overseas. Some opportunistic investors are circling hospitality plays as the region emerges from the pandemic restrictions on travel.”
Outbound investment from Asia and cross-border investment within the region was hit by the pandemic and related travel restrictions. However, there are signs it is starting to return, particularly from Singaporean and South Korean investors. “Cross-border capital flows from Asia are not only flowing to the United States and Europe, but they are also flowing south to Australia and across the Asia region,” says Rothstein.
He notes that Japanese investors are also looking abroad, ranging from private capital aggregated by wealth managers to developers involved in residential projects, often in emerging markets. “China will ultimately come back, but investment patterns will likely not be as before,” he says. “Investors will take a more measured institutional approach looking for properties or groups of properties across a broader geographical space which satisfy institutional investment criteria rather than high-profile properties that make a statement.”
Zhou adds that Chinese institutions are already behaving in this fashion at home, citing Ping An’s acquisition of stakes in six Raffles City mixed-use developments. The Chinese insurer is spending 33 billion yuan ($5.1 billion; €4.4 billion) to acquire majority stakes in six mixed-use developments, while CapitaLand will retain stakes of 12.6-30 percent in each asset and continue to manage the assets. The deal, says Zhou, is evidence of Chinese institutional investors’ increasing sophistication and the growing maturity of China’s real estate market.
The region’s growing body of homegrown institutional investors and investment managers shows its ‘frontier market’ days are over, and with transactions above pre-covid levels and strong fundraising, Asia-Pacific appears to be shaking off the lingering effects of the pandemic. The growing digital economy and relatively high economic growth, meanwhile, continue to drive the market forward.
Meet the roundtable
Co-founder and managing partner, GoHigh Capital
Zhou’s background is in investment banking, having worked for companies including Goldman Sachs and Warburg Pincus prior to co-founding GoHigh, a China-focused manager with $5.4 billion of assets under management. GoHigh also has a securitization arm and Zhou is one of the leading experts on real estate investment trusts in China and an expert consultant for the Asset Management Association of China.
Director, portfolio manager, AEW
Singapore-based Do has been managing AEW’s Asia-Pacific core investment strategy since 2020. She has more than 20 years of real estate investment experience in the Asia-Pacific region and has previously worked for Pan Asia Realty Advisors and UBS Asset Management. AEW has $89 billion of assets under management globally, of which $5.5 billion is in Asia-Pacific.
Shareholder, chair of Asia-Pacific real estate practice, Greenberg Traurig
Rothstein is an international real estate lawyer and chair of the Asia real estate practice at Greenberg Traurig. Based in Tokyo, Shanghai and New York, he advises across all major Asia markets with a particular focus on Japan, Greater China and South Korea. He also leads the firm’s practice in advising Asia-based outbound cross-border investors in structuring, implementing, and managing equity and debt investments across all global asset classes.
Co-CIO and head of Greater China, LaSalle Investment Management
Tang has more than 17 years of experience in real estate and investment management, both in the US and China. Prior to joining LaSalle, she held investment roles with broker Jones Lang LaSalle in Shanghai and manager GE Asset Management in the United States. LaSalle has $71 billion of real estate assets under management, of which $14 billion are in the Asia-Pacific region.