When it comes to global transaction volumes, all eyes have been on Asia Pacific, as investors watch the region’s real estate dealings rise inexorably from the trough of late 2008. Even counting the slight dip in transaction activity in the second quarter of this year – when the Chinese government took steps to tighten rules over development – there has been no holding Asia back.
In the first nine months of 2010, more than $202.2 billion of properties changed hands in the Asia region compared to $100.4 billion in Europe, the Middle East and Africa and $75.9 billion in the Americas. Although it only represented a 56 percent increase in transaction volume compared to the same period in 2009 – the Americas, for example, saw a 102% increase over the same timeframe – the region continues to see strong growth in deal flow.
During the third quarter alone, around $68.5 billion of properties were bought and sold, an increase of 43 percent in the three months to the end of June. The apartment sector registered the largest improvement, up by 110 percent by transaction volume and 219 percent by property count. However, all property types across the zone registered activity in the year to date as compared to the same period in 2009.
Deals by segment and market
In terms of the deals being done though, development land in China still is riding high. Despite Chinese government efforts to curb speculation and rising prices in the sector, six of the top 10 deals to take place in the Asia Pacific region in the third quarter were development related.
Two of the largest, at almost $3 billion, were the acquisition by the real estate arm of building and engineering firm, the Metallurgical Corp of China (MCC), for the land-use rights to two plots in Nanjing, China. The land, acquired from the Chinese government, will be used as part of the renovation of the old town of Xiaguan District and will see the development of a four million-square-metre mixed-use project.
China, of course, leads the gains seen in the third quarter numbers, with the country accounting for 65 percent of all Asia Pacific volume year to date. Other key countries driving deal flow in the region in the first three quarters were Hong Kong, Japan, Singapore and Taiwan.
Japan’s increase in the run-up to the end of the third quarter was primarily due to a robust Tokyo market, with the country as a whole showing continued signs of a slowdown in the three months to the end of September owing to deteriorating economic conditions. The wider economic concerns could play out into even lower growth in the near future, with Japan’s third quarter volume registering as the third lowest since the start of 2008.
However, as Japan’s average commercial cap rate rose slightly over the quarter, cap rates in other countries continued to decline, albeit slower than earlier in the year. Notably, commercial cap rates in Asia (excluding Japan) compressed by 20 basis points between the second and third quarters to an astounding 3.9 percent. That figure is 166 bps below Japan’s average and a whopping 413 bps below that of the Australia/New Zealand region.
While the largest transactions were in China development, the property sector with the most momentum across the Asia Pacific zone was apartments, with large gains for Singapore, Japan and China compared to 2009. Average apartment cap rates dropped by 40 bps between the second and third quarters to 5.5 percent and are now on par with 2008 cap rates.
Office properties, most notably in Singapore, Australia, Hong Kong and Taiwan, likewise posted momentum gains. Although Japan’s activity was lacklustre in the third quarter, Tokyo by far was the most active market in the Asia Pacific zone year to date, with $15.3 billion of commercial transactions – almost two-thirds of that in office. Hong Kong came in second place as the most active market, followed by Singapore, which bypassed Shanghai to become the third-leading market of 2010 to date.
Buyers and sellers
Despite the shifting momentum and jostling of top markets, however, China deals remain among the largest. Top buyers continue to be primarily publicly-traded companies buying domestically with a few notable exceptions, such as MCC.
Of the 10 top buyers in the Asia Pacific region during the third quarter, half were headquartered in China. The top four buyers in China spent a combined $7.3 billion in the three months to the end of September, and the seller was the Chinese government in each case.
When it comes to sellers though, there is much more diversity with equity funds, publicly traded groups, institutional, private groups and quasi-public entities all filling the ranks.
The top seller in the region during the third quarter – and significantly ahead of the pack – was Goldman Sachs, primarily selling office properties in Japan as well as in China and Singapore. CapitaLand came in a distant second after selling retail and warehouse assets in Australia, China, Singapore and Malaysia.
Year to date, however, Goldman Sachs only comes in fifth, with Tokyo-based development company, Mori Trust Holdings, clinching the top spot by selling three properties for $2.6 billion. That beat out Singapore’s Urban Redevelopment Authority, which sold 17 properties for $2.2 billion.
In October, a RREEF open-ended fund acquired the flagship store of retailer Uniqlo from AIG Real Estate, just as the latter prepares to be sold
As Invesco Real Estate positioned itself to take over the private equity real estate platform of embattled insurer AIG, other investment managers lined themselves up to take advantage of individual asset sales by the group.
RREEF, the property investment arm of Deutsche Bank, was one such firm to capitalise on the situation when it acquired the flagship store of Japanese retailer Uniqlo from AIG Real Estate for ¥19.4 billion (€174 million; $230.2 million). The 449,705-square-foot, four-storey property in Osaka’s Shinsaibashi shopping district was developed earlier this year by AIG-owned developer Socrates TMK and is leased solely to Uniqlo until October 2020.
RREEF acquired the property on behalf of its open-ended Grunbesitz fund, which currently owns 51 properties around the world valued at approximately €2.84 billion. According to Real Capital Analytics, the property was underwritten with a five percent cap rate. The Grunbesitz fund’s exposure to Asia currently stands at 24 percent following the acquisition.
Unlike the bank’s core-style vehicles, RREEF’s real estate opportunity funds have been slower on the acquisition front. In August, the firm’s $1.6 billion Global Opportunities Fund II secured a $100 million senior unsecured debt facility from investors to be used to restructure and pay down debt and for property improvements.
Goldman Sachs’ property funds became the target of Deka’s open-ended core vehicle when the German fund manager bought a Singapore office tower at a discount
Global opportunity funds are not the only ones looking to find distressed deals in Asia. So too are traditional core players. And sometimes those core investors are finding the best opportunities from the private equity real estate platforms themselves.
German fund manager Deka Immobilien did just that in October when it bought the 262,230-square-foot Chevron House office property in Singapore from a Goldman Sachs real estate fund for at least a 14 percent discount on its previous $478.2 million acquisition price, which was reached in 2007. Deka currently paid the investment bank just S$538 million (€308.5 million; $408.4 million).
With an occupancy rate of 98 percent and major tenants such as Chevron and Visa, the Raffles Place tower easily fits into Deka’s portfolio of stablised, cash-flowing assets. The deal, underwritten with a four percent cap rate, was bought on behalf of Deka’s open-ended mutual property fund Deka-Immobilien Global. Broker Savills said, with prime rental levels off roughly 50 percent from their peak, there was “strong potential for rental growth and asset enhancements”.
Goldman was one of the most active real estate sellers in the Asia Pacific region in the third quarter, and the fifth most active disposer of assets in the first nine months of the year, according to Real Capital Analytics. In total, the bank sold 12 assets for approximately $1.8 billion.