LOOK AHEAD 2022: A shift to value-add in Asia-Pacific

With structural changes in the economy, more properties in the region need repositioning through the use of technology, conversion or upgrade to a higher environmental standard.

Expect the value-add risk and return profile to gain more traction in Asia-Pacific in 2022 as many existing properties become inefficient due to the structural changes taking place in the global economy, according to a survey by PwC and the Urban Land Institute.

Real estate broker JLL pointed out 40 percent of Asia-Pacific office space is currently in need of refurbishment, representing around $400 billion of potential investments. Increasing volumes of office and retail space are also in need of repositioning as alternative assets as the world shifts to more flexible working environments and e-commerce continues to represent a greater share of retail activity, according to the report.

As more value-add opportunities have become available in the region, traditional core investors are increasingly also looking to tap the space. For these traditionally lower-risk investors, the shift into value-add strategy also reflects “a mean to bypass the endless grind of cap-rate compression” in the region, the report said.

“You’re seeing more core investors come into the market, and they’re willing to pay up a bit,” the report quoted a fund manager in Tokyo. “They’re not getting bargains. But they’re definitely pushing into the market.”

The greater engagement with value-add strategies also comes together with the growing mandate for more green buildings across the region. Over 72 percent of the reports’ survey respondents considered ESG as a mandatory, or significant, factor when they are making investment decisions.

“Funds are paying more for the green mandate because they can generate more demand from tenants, and therefore higher rentals. That’s because big corporate tenants, particularly in markets like Australia, are now adopting policies that they won’t take space in buildings below a certain rating,” said a Hong Kong-based private equity investor quoted in the report.

As a result, value-add funds can now upgrade well-located non-compliant buildings for ESG purposes and sell them to institutional investors looking for future-proofed buildings.

With these driving forces in mind, the report has identified a few key value-add opportunities in the region in 2022.

Technology: Investors have shifted from improving the aircon and lighting system of the buildings to acquiring and analyzing data. “The value-add is focused around office assets becoming data enabled, as the expectation of corporates that have large office space is for more real-time data [focused] on space utilization and things like energy usage,” an Australian investor commented in the report.

China: The government’s effort to deleverage domestic developers has led to a series of cashflow disruptions in the country’s real estate market. Foreign funds with local teams can now have access to more “value-add/stressed-sale” opportunities as more developers are offloading some of their “underperforming non-core assets” at discount to repay their debts.

Hotels: With the reduction of business travel in the long term due to the growth of teleconferencing, the sector is not expected to rebound to the previous level. This has prompted asset owners to look at hotel conversation in the region, especially in metropolitans like Hong Kong and Tokyo where “land values are high enough to justify the cost of adapting or redeveloping properties.”