Strong real estate fundraising activity in Asia in recent years has translated to a steady stream of investment activity, with $20 billion of acquisitions recorded in 2015, according to CBRE data. After all, the real estate investment market remains buoyant, supported by ongoing low interest rates and high liquidity, even as we see reduced optimism about the region’s economic outlook. Against this backdrop, however, fund managers have had to adjust accordingly.
For one thing, funds have moved up the risk curve to meet return hurdles. A large number of new funds have pursued value-add strategies, although this has been met with a shortage of suitable assets. For managers focused on value-add, they increasingly have to look to alternative strategies, such as high yield debt, niche sectors such as self-storage and data centers, emerging Asian markets, and development. Also, with increased capital competition, funds may have to do a greater number of smaller deals.
There has also been a number of recently-launched core funds, and these funds have increasingly had to shift approach and increase risk by moving from core to core-plus investments—looking at grade B assets in core locations or grade A assets in decentralized locations, covering major cities in the Asia Pacific, although not necessarily developed markets. As the challenge of locating investable core stock intensifies in 2016, we expect this trend to strengthen. It will get harder to find assets that are accretive, and they will increasingly need to look to other sectors beyond office, or take development risk, such as develop-to-core strategies.
Aside from funds taking on a higher risk profile, real estate strategies also have expanded to include new types of investments. For example, with core and core-plus investors attracted to funds with established, visible assets, we expect that secondaries investments will increase substantially in 2016. Until recently, few investors have been willing to sell in the secondary market given that their assets have outperformed. However, the fall in equity markets now means that some investors will be forced to sell in the secondary markets to match their target allocations.
Meanwhile, the prolonged period of low interest rates means landlords will remain under little pressure to sell at lower prices in 2016. However, investors are unwilling to pay high prices to chase assets, given the weaker rental outlook and uncertainty of the global economic outlook. This will ensure the gap between buyers’ and sellers’ expectations remains. This combination of low interest rates, low yields and weaker fundamental outlook will prompt investors to focus on assets that have potential income growth and markets expecting solid rental growth, a trend which means more investors competing for core assets.
Real estate debt has been another avenue for capturing higher yields in a bond-like investment. We have already seen real estate funds investing in real estate debt and we expect that there will be opportunity in the region as banks will turn more prudent toward real estate lending due to higher capital requirements from regulators.
Fundraising activity is expected to steady somewhat in 2016 after several highly active years, as the stock market volatility and the uncertain global economic and regional economic outlook began to dampen investor sentiment toward committing capital to real estate funds during the fourth quarter of last year. Fundraising activity has slowed down with only a few firms that have proven track records successfully raising capital.
New fund managers will still look to Asia Pacific for opportunities but it will take longer to form a suitable strategy to deploy capital. The relatively high income returns on offer in other regions, moreover, could slow the flow of global capital into Asia Pacific. For those that are looking to raise capital in the region, they will need to carefully consider their strategy, including whether to invest through the cycle and look for the best opportunities over the next two years in a dynamically shifting environment.
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