Despite an uncertain economic backdrop, the fundamentals of real estate markets across Asia remained for the most part uncompromisingly strong throughout 2013, with cap rates tightly compressed and transaction volumes rising going into the fourth quarter of the year. This resilience came as a surprise to many investors interviewed for this year’s Emerging Trends in Real Estate
Asia Pacific report, given the specter of higher interest rates hanging over the market as the U.S. Federal Reserve considers when to begin tapering its longstanding policy of monetary easing.
In 2014, the problem going forward will be not only fierce competition for most conventional asset types, but that historically low yields are more likely to go down than up once base rates begin to tick up. As a result, investors will move up the risk curve in 2014 as they seek out yield, looking for value in niche areas instead of the mainstream. In particular, this might mean buying smaller-sized, or B-grade, buildings, or those in secondary markets. It might also mean buying or developing assets in the logistics, senior care, or self-storage sectors, or as a green-building play. Investors are also more likely to consider taking development risk. Large institutional players, for example, are now breaking with tradition by partnering with big developers in China to build core assets.
Real estate capital flows in Asia remained robust in 2013, despite dislocations to regional portfolio flows caused by the threat of a tapering of U.S. economic stimulus. While bond and equity prices (including real estate investment trust [REIT] markets) have therefore dropped significantly from recent peaks, the physical market for real estate has so far been largely unaffected.
One reason for this is the increase in sovereign wealth and institutional capital now aimed at Asian markets. Another is that Asian capital has become increasingly dominant in the post–global financial crisis environment, especially given the substantial volumes of capital being exported from individual Asian countries (in particular China, South Korea, and Singapore) into real estate assets across the region. This can be expected to continue in 2014. One of the biggest recipients of these (and also of global) flows is Japan, where the government has begun a massive monetary stimulus program aimed at jump-starting inflation in the economy.
In addition, major real estate markets in the West are for the first time attracting large flows of Asian capital of all types—sovereign wealth, institutional, insurance company, and private money is now flooding westward in unprecedented volumes. These flows are set to continue going forward, despite increasing tightness in gateway markets.
On the financial side, Asia’s banks remain as accommodating as ever—if not more so—in providing credit for real estate. Terms may have tightened very slightly in some markets, but in others, and especially Japan, they have loosened. Across Asia, loan-to-value ratios of 60 to 65 percent are widely available (and even higher in Japan), while the cost of debt remains low. In China and India, however, bank credit remains tight. On the capital markets side, equities have been hit by the threat of the tapering, as foreign funds are repatriated, but the bond markets have seesawed throughout the year—the market window remained open at the end of 2013, although this may prove a last hur rah. REITs, too, have been hit by portfolio outflows, but they are mostly cashed up and will continue to be strong buyers in the coming year.
In the Emerging Trends in Real Estate Asia Pacific investment prospects survey, Japan reemerged by a wide margin as the top investment destination for the first time since 2009, buoyed by a wave of optimism over the positive impact of Abenomics. In addition, the survey registered continuing interest carried over from last year in assets located in Asia’s emerging markets, including Jakarta and Manila in particular, despite problems of various kinds—from a lack of transparency to a lack of investable stock. In the survey’s sector-by-sector ratings, industrial/distribution remains the favored play—again by a wide margin—followed by the residential, office, and retail sectors.