Asia-Pacific is the top emerging market pick for investors

Institutional investors prefer the region to other emerging real estate destinations. Mark Cooper reports

Demographics and growth underpin the attractiveness of the Asia-Pacific region for real estate investors, while its mature markets also offer stability and attractive pricing.

The PERE Investor Perspectives survey asked investors which emerging market geographies they would consider for investment over the next 12 months; 84.1 percent declared they would consider Asia-Pacific. The next most popular area was central and eastern Europe, a pick for 39 percent of respondents.

Benedict Lai, research manager at Savills Investment Management, says: “Global institutional investors are keen to diversify into Asian real estate due to the region’s robust macro fundamentals and its relative value amid heightened global economic risks.”

This enthusiasm for Asia-Pacific real estate has been shown in other surveys. In January, an investment intentions survey by non-listed real estate organizations ANREV, INREV and PREA found that 56.7 percent of investors expected to increase their allocation to Asia-Pacific real estate this year, compared with 51.5 percent expecting to invest more in Europe and 47.8 percent that said they would raise their allocation to US real estate.

Urban attraction

Underpinning the region’s attraction is demographics and growth. It is home to the world’s post populous nations, with China and India having a combined population of more than 2.7 billion. Asia-Pacific is also home to many of the world’s largest cities and the United Nations predicts it will have 30 cities with a population above five million by 2030.

Most dramatically in China, where 20 million people move from rural areas to cities very year, urbanization has driven growth. Agricultural workers have moved into more productive jobs. China is moving to a new stage of urbanization with the creation of multi-city conurbations. The Greater Bay Area, which includes Hong Kong, Macau, Guangzhou, Shenzhen and five neighbouring cities, has a population of 70 million and is predicted to be the seventh largest economy in the world by 2030.

Urbanization has kept GDP growth above 6 percent in China, even though it has slowed in recent years. India is growing even faster. The Asian Development Bank reckons Asia-Pacific accounts for 60 percent of global growth. This economic growth is creating hundreds of millions of middle class consumers, all of whom need retail, residential and commercial real estate. By 2030 the United Nations projects that the region will account for 60 percent of the world’s middle-class wealth.

The e-commerce factor

The growth of e-commerce has been as significant for real estate investors in Asia-Pacific as for consumers. The regional picture is very diverse: China is the world’s largest and most advanced e-commerce market, while countries such as Indonesia and India are just beginning to embrace online shopping. The rise of e-commerce, as well as continued growth in manufacturing and exports, has made logistics property a top pick for investors in Asia-Pacific.

Large global investors such as PGGM, GIC Private and Canada Pension Plan Investment Board have allocated billions of dollars to logistics real estate in Asia-Pacific, backing platforms and investing in funds. Smaller investors are seeking to follow them.

“The logistics sector has become very popular given the growth (and projected growth) in e-commerce, the shift away from traditional retail and the predicable income streams the asset class offers investors,” says Lee Tredwell, head of investment, Australia, at Savills Investment Management.

More transparency, less risk

Developing real estate markets in Asia is also much less risky than in the past. “The Asian real estate market has come a long way as transparency in the region continues to improve. This has also resulted in significant capital flows into the region,” says Lai. Many nations have introduced real estate investment trusts and data is more available than ever. For example India is starting to see improvements in transparency following a raft of legislation from the pro-business government of Narendra Modi. This includes the Real Estate (Regulation and Development) Act, 2016, which introduced greater protection for property buyers and better registration of development projects. More mature markets mean a greater range of risk and return opportunities for investors.

Investors are more able to allocate capital to Asia-Pacific today than in previous years. More Asian nations are opening up to foreign direct investment, while Australia and New Zealand remain among the world’s most open economies. There are more large international and local investment managers operating in Asia-Pacific than ever before and a broader range of strategies, from niche sector strategies to regional core and core-plus vehicles, available for investors.

While Asia-Pacific might overall be considered an emerging market, it contains mature markets which have proven very attractive for cross-border investors, Tredwell says: “Investors are attracted to Australia because it offers a connection to the overall growth story of Asia alongside stability and transparency: a Western legal system, freehold land and landlord-friendly lease structures.”

Australia and Japan, the largest mature markets in the region, offer attractive pricing compared with developed markets elsewhere, due to higher yields (in Australia) and low borrowing costs (in Japan). Lai says: “While Asia-Pacific has been traditionally associated with emerging markets such as Eastern Europe or Latin America, its gateway cities are comparable to the developed US and European markets. For instance, yield spreads in some of the developed Asian office markets like Osaka and Tokyo in Japan or Brisbane and Melbourne in Australia offer similar or higher yield spreads compared with other gateway cities such as New York or London.”

The ANREV, INREV, PREA Investment Intentions survey found Sydney, Melbourne and Tokyo to be the top three investment destinations for those institutions that planned to invest in Asia-Pacific real estate.

As monetary policy tightens in Europe and the US, Japan’s expansionary policies, designed to keep the economy buoyant after two decades of stagnation, offer a contrast for real estate investors, says Lai. “With Japanese monetary policy set to remain loose for the foreseeable future, historically wide yield spreads suggest a strong possibility for further modest yield compression in Greater Tokyo and the major regional Japanese markets, where investors are increasingly active.”

In contrast, a more difficult financing environment for domestic real estate players is attracting foreign capital to China. Restrictions in China on shadow banking and other domestic capital sources have made life more difficult for local investors, while selective reduction of barriers to foreign investment in some jurisdictions are leading private equity firms and other cross-border investors to take another look at China.

A similar picture is emerging in Australia, says Lai. “The liquidity crunch, due to credit tightening in the housing market reducing major banks’ ability to lend, has created a funding gap in the market. This offers funding opportunities as the market cycle matures, with debt frequently offering more protection than equity.”

The ongoing trade war between the US and China may be causing jitters and dampening economic expectations in the short term, but Asia-Pacific remains relatively politically stable. Lai says: “Asian countries are fostering stronger integration as well as trade ties at a time when Europe is dealing with uncertainties surrounding the EU and the breakaway of one of its key trading partners, the UK.”

Diversification is an important consideration for global investors and Asia-Pacific real estate returns tend to be less correlated with returns in the US and Europe. Furthermore, Asia-Pacific is a diverse region, with markets tending to be at different stage in the cycle. For example, strong rental growth is being predicted for the office sector in Singapore, Sydney and Osaka, while rents are bottoming out in the same sector in Jakarta.