Asia’s distinction from the West has become a double-edged sword

A prevailing narrative at the PERE Network Asia Summit in recent years is how market dynamics in the Asia-Pacific region differ from those in the US and Europe, generally to the benefit of those operating in the former.

This year’s conference – PERE’s largest ever, with more than 600 property professionals convening at the Shangri-La Singapore this week – was no different in that respect. But what has changed is that APAC’s distinction from the rest of the world has now become more of a double-edged sword.

The opening panel discussion on the first day of the conference, for example, addressed the relevance of the US market refrain “Stay alive ‘til ‘25” in the Asia-Pacific region. Benjamin Lee, managing partner at Phoenix Property Partners, noted in the aftermath of the Asian financial crisis of 1997, banks in the region have become well-capitalized relative to their large US counterparts. Meanwhile, loan-to-value ratios in Asia-Pacific are at 50 percent, compared with around 60 percent in the US and Europe. This provides APAC real estate owners with more room to maneuver in a higher-for-longer rate environment, he said.

Additionally, lending growth in the region has averaged around 6 percent over the last five years – about half of the growth rate before the global financial crisis, according to Lee. Also protecting APAC’s property owners from credit market dislocation is the often-cited distinction that office markets in the region have been less heavily impacted by staff working from home than in the US and Europe. With the office vacancy rate less than 5 percent in markets such as Korea and Japan, the region’s lenders also have less exposure to troubled loans tied to office assets with rising vacancies and falling cash flows.

A healthier banking system in APAC, however, makes the region a less attractive investment destination compared to its Western counterparts, at least for the foreseeable future. During a Day 2 investor panel, George Agethen, executive vice-president and co-head of Asia-Pacific at Ivanhoé Cambridge, said he expected the opportunity set and returns in Asia would be lower in the next 12 months than the US and Europe.

During a different investor-focused session, Simon Mok, head portfolio manager of international private real estate at Employees Retirement System of Texas, also noted that because pricing adjustments have been much faster and steeper in the US, the pension plan will focus on doing distressed and credit deals in its home country in the short term.

Similarly, when asked how he would prioritize regions for investment, Kian Sin Toh, head of real estate at Asian insurer AIA, said he would do so in order of where he saw the biggest correction and expected to see a recovery first: the US, Europe and then Asia.

That said, many global investors still believe it is important to continue investing in the region for diversification over the long term. Hamish MacDonald, head of Asia-Pacific real estate equity at BlackRock, pointed out that in addition to offering regional diversification within the context of a global institutional portfolio, Asia provides intraregional diversification with highly differentiated markets such as Japan and Australia.

Indeed, investors such as the Qatar Investment Authority, Texas ERS and Zurich Insurance Group all expressed intentions onstage to increase their allocations to Asia-Pacific real estate. In the short term, however, capital flows will be directed elsewhere to pursue the distressed opportunities many investors on the sidelines have long anticipated.