Inbound investment into real estate in Asia in 2015 is expected to increase by more than three times the rate of the region's growth in 2014, a white paper by Colliers International has estimated.
Adopting a seemingly contrarian stance, the property services firm also has predicted inbound investment in Asia will far outpace the growth in outbound investment by investors from the region.
Capital flows into Asia, which includes both overseas investments and intra-Asia capital flow, will take a “quantum leap” this year, said Colliers in the paper titled “Tug of War”. A narrowing of the gap between the returns generated in Asia, and in the overseas markets, as well as the increase in the availability of quality assets in markets such as Shanghai, Hong Kong and Singapore, have been cited as reasons for such high volumes.
“Inbound investment into real estate in the region will increase by 102 percent this calendar year, as compared to 33 percent in 2014” said Terence Tang, managing director of capital markets and investment services in Asia for Colliers International. In contrast, outbound investment in real estate is expected to increase by 61 percent, up from the 38 percent increase in 2014.
The report has projected Shanghai as the most attractive investment destination in Asia, despite concerns around the slowdown in economic growth in China. Offices in Pudong, for instance, could generate an IRR of around 12 percent to 15 percent within an investment period of five years. Grade A office buildings in decentralised locations in Hong Kong and high-end luxury apartments in Singapore are the other sectors and regions expected to pique investors’ interest.
Direct investment flow into Asia is estimated to increase by 12 percent this year, as compared to the flat growth between 2011 and 2014, led by pro-growth measures in places like India and China.
Greater capital inflow is expected in Asia not just from overseas investors but also Asian institutional investors, who will become more willing to invest in real estate outside their domestic market but within the region, largely due to the greater availability of assets. Intra-Asia flows, according to the report, are expected to increase by 58 percent to reach $62 billion in 2015, a significant jump from the $39 billion invested in 2014.
The office sector is expected to lead much of this demand. As much as 100 million square feet of new office space is estimated to be generated through the year. Other favourites for investors will include the logistics sector and investing in development projects.
One of the key factors propelling investors’ demand for overseas real estate is the higher returns available in the European and US markets as compared to the returns generated within Asia.
That may soon change with a compression in yields.
The findings by Colliers have estimated that the yield-spread difference, for example, between prime office assets in Hong Kong and London’s West End compressed from around 200 bps in 2008 to about 60 bps in 2014. While prime office yields in London declined from 6 percent in 2008 to 3.5 percent in 2014, the prime office yields in Hong Kong remained stable at 2.9 percent.
There are also signs of a demand and supply mismatch in markets such as the US, which could also moderate Asian investors’ interest. According to the report, there are fewer income-producing assets available for sale in prime locations in the country because most of the existing developments have been snapped up. On the other hand, while there are more opportunities in secondary locations circling some of the gateway cities, investors continue to focus only on traditional gateway cities.