This article is sponsored by CBRE Investment Management
Amid recession fears and looming interest rate increases, real estate investors are searching for relative safety in certain Asia-Pacific markets. Factors related to migration, covid and supply chains have altered supply and demand dynamics in several key cities, boosting capital flows in some and limiting them in others. Adrian Baker, chief investment officer of APAC direct real estate strategies at CBRE Investment Management, gives his take on the most attractive opportunities in the region.
Which APAC cities are attracting significant capital flows at present?
The capital flows we are seeing in APAC are being driven in some markets by the economic environment, particularly interest rates, and in other markets by local real estate fundamentals.
In terms of interest rates, Japan continues to see the widest positive spread between real estate yields and cost of debt, so it is observing ongoing capital flows.
This is more pronounced in the logistics and residential sectors, and primarily in the major cities of Tokyo, Osaka and Fukuoka.
While most other countries in APAC have a negative spread – where the cost of debt is higher than the real estate yield – in Japan, residential and logistics yields are 3.5 percent to 4 percent, and you can still borrow at 1 percent per annum.
On the other side of that, we’re seeing very strong real estate fundamentals in office space in Seoul and Singapore. Separately, we are seeing very strong demand for and rental growth in logistics assets across Sydney, Brisbane and Melbourne.
Where are international real estate investors being more cautious?
International investors, particularly European and US institutions, are very cautious about investing in China, and that also includes Hong Kong. This is being driven by the ongoing covid lockdowns and the uncertainty created by the restrictions and quarantine associated with travel, as well as broader geopolitical concerns. The whole country is being impacted by this. Those investing in China are only looking at Tier 1 cities – Beijing, Greater Beijing, Shanghai and what we call the Greater Bay Area around Shenzhen and Guangzhou. But, at the moment, this is a country issue rather than a city issue.
That is where we are seeing caution from a market perspective. When it comes to individual sectors, certain office and retail markets are still struggling to fully rebound post-pandemic.
A significant number of people and companies are leaving Hong Kong due to political unrest and strict pandemic measures, as you mentioned. Where are they moving to? And is this creating real estate opportunities in these new destinations?
Historically, Singapore and Hong Kong have been the preferred locations for the headquarters of large companies operating in Asia-Pacific. But with Hong Kong becoming integrated into China, and due to covid-related travel restrictions, more people and companies are moving from Hong Kong to Singapore.
As a result, demand for residential property and quality office space in Singapore is increasing dramatically. We have seen significant rental growth in residential and office sectors in the country, a trend that began around 12 to 18 months ago and remains strong. Indeed, the integration of Hong Kong into China is a longer-term issue: it is not a cyclical event, but structural change, which makes Singapore an incredibly attractive place to invest in.
Are there any other locations in APAC with strong demand for office space?
Office generally continues to struggle post-pandemic, with working from home still an ongoing theme. Many office occupiers now want high-quality, state-of-the-art office space, but much of the stock is not up to the standards that tenants are looking for. We expect this to be a structural challenge over the medium or potentially longer term.
That said, there are several unique markets where office demand has been strong. In addition to Singapore, as mentioned, Seoul has seen favorable supply/demand drivers during 2022. The supply in Seoul has been relatively limited and the demand side has been stronger than expected, which has been the key driver. When demand for office space returned post-covid, supply was limited, as there had not been enough development during the pandemic.
Booming e-commerce continues to drive demand for logistics properties. Where are you seeing strong market fundamentals to invest in this sector?
E-commerce benefited significantly during the height of the pandemic, although that peak has passed. Over the last 12 months, demand has returned to a more steady and sustainable growth.
What we see now, particularly in markets like Japan, is that manufacturers actually need a lot more logistics space – supply chain concerns mean they are holding a lot more inventory than they used to. The markets where we note strong demand due to e-commerce or from manufacturers include the major Australian cities of Sydney, Melbourne and Brisbane, as well as some Japanese cities, particularly Tokyo, Osaka and Fukuoka.
It is important to highlight that many of those locations are big cities, and so choosing the right submarket for logistics within those cities will have a significant influence in terms of returns and performance. For instance, there is quite a bit of new supply coming into the Fukuoka market, but a lot is located far from Fukuoka city center. With assets that are easily accessible from the city, however, there has been very strong demand and zero vacancy.
Residential has been another ‘winning’ sector during the pandemic. Where are the opportunities to invest in multifamily properties?
Multifamily in Asia-Pacific is largely only investible in Japan. Multifamily opportunities are emerging elsewhere, but they are still in relative infancy. For example, Australia is starting to see the build-to-rent segment growing, but it is still quite early.
In Japan, the strongest demand from a multifamily perspective is in Tokyo and Osaka, where migration has driven demand for residential. In Nagoya, however, we have seen the opposite. There has been a net loss in migration, so the movement of people has impacted demand for residential at a time when there is of a lot of new supply in the market, which has made the situation quite challenging.