ULI: long-term trends dominate Asia strategies

Even for investors seeking opportunistic returns, Asia’s compressing yields are forcing the focus on the long-term “megatrends” underlying property, delegates heard at the ULI Asia Pacific Summit.

Playing to the long-term trends in Asia’s property markets, such as e-commerce and demographics, has become the primary focus of investors seeking returns from real estate investments, delegates heard at the ULI Asia Pacific Summit in Hong Kong.

Real estate has traditionally been about “location, location, location,” Jones Lang LaSalle capital markets research director David Green-Morgan said. But he added that he has seen investors in the Asia-Pacific region become more granular in their strategies. Rather than looking at all strategies in one country, for example, investors will select specific cities and specific sectors in those cities.

A major driver of investor focus is compressing yields in the Asia-Pacific. Greg Penn, managing director of CBRE global capital markets Asia, said the region is facing “historically low yields,” as well as low rental growth. Yet the capital chasing deals has not slowed down, he added.

“Lower cap rates mean a low margin for error,” said Alison Cooke, managing director of real estate at Starr International Investment Advisors in Asia. “Thus, investors are learning to focus more on the fundamentals of real estate, or the megatrends of 10 to 15 years.”

Those megatrends range from demographics to business process outsourcing. Vietnam, for example, has a young population that can spur economic growth, which coupled with government policy makes the country a good bet in the long-term, even for short-term opportunistic players, Cooke posited. China, on the other hand, has an aging population, which could make senior housing a more compelling real estate strategy, she said.

One Asia-based institutional investor said that despite the risks, it likes to invest in emerging markets because the “fundamentals” of the economies are solid. The investor recently closed a deal in Jakarta because despite the country’s short-term volatility, she thought the country “had enough fundamentals going for it long-term.” She only cautioned potential investors in Asia to watch out for oversupply in certain submarkets.

“Within our country footprint and client base, there’s not any single market we avoid,” agreed Brian Chinappi, managing director and global head principal of finance real estate at Standard Chartered Bank. “Rather we look for job growth and other drivers of real demand.”

Many Asian markets remain dominated by local players, but international investors can still differentiate themselves by riding these megatrends, according to David Edwards, senior vice president at Rockefeller family-founded property firm Rose Rock Group. “If it’s not a level playing field, don’t play uphill – play downhill,” he explained. “In China, [for example,] read the government’s 5-Year Plans, and bet on trends that will have government support rather than government resistance.”