ASIAVIEW: Pivot to Asia

The West’s loss is shaping up to become Asia’s gain.

With looming uncertainty around Brexit, a rash of upcoming European elections, and US President Donald Trump’s protectionist rhetoric, many Asian investors are increasing their domestic and intra-regional property investments.

Until recently, the bulk of Asian capital was only heading one way: overseas. However, at a time when global economic worries remain the biggest concern for investors, their home region is their preferred destination, according to CBRE’s 2017 Asia-Pacific Investor Intentions Survey, which polled over 500 respondents.

For China, one of the world’s biggest cross-border property investors, both internal and external factors are prompting this pivot to Asia. Chinese investors accounted for 17 percent of the overall property investment within Asia last year, up from 7.9 percent in 2015, Colliers recently noted in a research paper.

A depreciating yuan in late 2015 and early 2016 was the chief reason behind a torrent of Chinese capital seeking a safe haven in overseas real estate, but a relatively stable currency in recent few months has rekindled mainland investors’ interest in purchasing domestic properties. This is true especially for those investors that do not want to take on the currency risk associated with investing in markets outside their home turf.

And for those that continue to harbor ambitions of expanding their global real estate portfolio, it is becoming harder to surpass growing regulatory scrutiny by the Chinese government on capital outflows, notably to the US.

It doesn’t help matters that China and US diplomatic ties have been put to the test since the Trump administration took over. Additionally, the Committee on Foreign Investment in the United States, a pan-governmental US group that reviews foreign investments in sectors with a bearing on national security, has also intensified its focus on real estate deals, creating a regulatory double whammy for Chinese investors.

As Beijing attempts to expand its influence within Asia, the signatory countries of the ‘One Belt, One Road’ initiative, for instance, could see more Chinese investments in sectors including real estate. China has reportedly overtaken Singapore to become the biggest foreign investor in Malaysian real estate, for example.

Neighboring Hong Kong is also seeing increasing direct property investments by mainland Chinese conglomerates, a landmark example being China Everbright’s $1.3 billion purchase of the Dah Sing Financial Centre in Wan Chai last year.

Another prominent group of Asian investors ramping up domestic purchases are the Korean institutions. In 2016, domestic investments in South Korean real estate jumped to $12.4 billion, a whopping 75 percent increase from 2015 volumes, according to JLL. This trend should continue unabated in 2017 judging by the buying opportunities being created in the real estate sector. Some of the ‘chaebols,’ a term used to describe the major South Korean family-run conglomerates, are understood to be seeking to offload their non-core assets and lease back some properties in a bid to improve their balance sheet.

The growing appeal of domestic investments became more evident last month during the bidding process for a $600 million prime office tower deal in Seoul. One of the largest Korean pension funds reportedly submitted a letter of intent disclosing its intended equity investment and the asset manager through which it would be making the investment. According to industry observers, the Korean pension fund, whose name was not disclosed, usually does not make such disclosures in the early stages of bidding. But, as one source pointed out, the investor has not deployed money in the home market for some time, and the LOI was submitted to reflect its “genuine commitment” towards the deal, and potentially increase its chances of securing the trophy asset.

Most of the major intra-regional deals appear to be direct investments for now. However, if Asia continues to be perceived as a more stable investing environment compared with other regions, Asia-focused fund managers may also eventually find the geographical composition of their investor base tilting in favor of Asian capital.