Asia’s real estate markets are the product of almost eight years of easy money from the world’s central banks. Easing in the United States may have ended, but both Japan and the European Union continue to provide liquidity, while interest rates in many Asian countries are now lower than they were a year ago. With both local and global institutional investors also allocating more capital to the sector, the result is more money chasing fewer assets, pushing prices up across most markets and sectors even as the current cycle appears increasingly long in the tooth.
The main takeaways from this year’s Emerging Trends research include the following:
- Weak transactional activity in the first half of the year was attributed mainly to slower sales in China. While some international investors remain cautious about the mainland, transactions across the region picked up strongly in the second half and are now expected to match or exceed last year’s record levels.
- Yields are also pushing record heights in most markets, but buying momentum seems unlikely to slow in 2016. As a result, although a few investors see current pricing as a high-water mark, the majority believe the growing weight of capital will continue to push prices up and yields down, albeit at a slowing pace. Meanwhile, investors increasingly are opting to take profits, exiting deals made in the years after the global financial crisis.
- With yields in Asia now at levels often deemed uncompetitive compared with deals on offer in the United States and Europe, some investors continue to move up the risk curve, investing in asset classes and geographies that provide better returns. At the same time, this trend has probably slowed since last year. Investors with an eye on a possible peak in the cycle are more likely to gravitate toward the safety of core assets in gateway cities.
- Although yields may have further to run in markets such as Australia and Japan, many investors now see rental growth (rather than cap-rate compression) as a source of future profits. This is a controversial notion, however. While the cycles in both countries are at a point where rent increases are plausible, other investors see such expectations as rationalizations.
- Opportunistic returns are tough to find in the current environment, but plenty of funds operate—apparently profitably—in the space. The best venues for opportunistic returns currently are Japan (where cheap debt and high leverage provide scope to financially engineer outsized profits) and China (where developers are strapped for cash, liquidity is in short supply, and the slowing economy is scaring away other potential sources of capital). Opportunities for distress, meanwhile, remain elusive, with the possible exceptions of China and India.
- As more institutional investors crowd into Asian markets, the need to find ways to invest large sums of capital is leading to a proliferation of mergers and acquisitions and portfolio-type deals.
- Emerging markets such as the Philippines, Vietnam, and Indonesia have enduring appeal given the higher yields and growth they offer. But most investors are steering clear in practice given the heightened levels of risk in the current environment, with high exchange rate and capital flow volatility as the United States heads toward an impeding hike in the base rate.
- There is plenty of risk out there, but the most commonly mentioned scenarios involved faster-than-expected increases in interest rates, and—a perennial favorite—a hard landing in China with a knock-on effect across the rest of Asia.
In terms of capital flows, this year has seen a cash migration from Asia to other parts of the world that surpasses even last year’s record levels. Nor is this exodus set to slow. Most investors see only continuing increases in capital movements to
real estate markets in the West, with one calling it “one of the biggest stories in our industry.”
The main contributor to this trend is China, where institutional, corporate, and private capital is buying (within Asia) mainly in Australia and Japan, and (outside Asia) mainly in the United States. Singapore also is a major exporter of capital. The huge amounts of money now headed to the United States are a reversal of last year’s outflows, which were more focused on Europe, and in particular London. The United States is now favored partly because of anticipated currency appreciation and partly because the European distress story has largely played out.
On the banking front, there is still plenty of liquidity to fund property investments. Borrowing terms in most jurisdictions remain largely unchanged in the face of impending interest rate rises, with the possible exception of Hong Kong and Singapore. Japan remains the easiest market in which to raise debt, with borrowing easily available at rates of less than 1 percent. International banks are now increasingly active in Asia, offering longer tenor than the traditional three- to five-year terms.
In the capital markets, bond financing remains widely available and has become arguably the number-one option for Chinese developers to raise capital, usually by way of domestic issues, which are now significantly cheaper than foreign-currency debt issued on regional stock markets (usually in Hong Kong).
Regional real estate investment trust (REIT) markets have declined somewhat from last year’s highs as expectations of higher interest rates dim the appeal of investments that trade similarly to bonds. Nonetheless, regional REIT indices remain at elevated levels compared with where they were trading several years ago. Moves are afoot to develop REIT markets in various emerging markets, with some progress toward that goal made in India and China, although realistically functioning REIT markets in these countries remain some way off. The Philippines may make more progress on this front should the government change following upcoming general elections.
This year’s Investment Prospects survey reflects an overwhelming preference among investors to buy in the region’s most developed markets—Japan and Australia. Tokyo’s top ranking in 2016 completes a hat trick of wins for the city over the last three years. Osaka, Sydney, and Melbourne occupy the remaining top four places, underscoring investors’ quest for asset quality and yield.
Other major survey findings include continuing caution about investing in China, with concern centered on an array of issues ranging from a soft economy, a depreciating currency, oversupply, and compressed cap rates. Shanghai is the one market where investors remain more positive, reflecting its status as China’s only true gateway city where prime assets will always be in demand.
The industrial/logistics sector, meanwhile, continues to be highly favored on the basis of better-than-average cap rates, tied with what is likely to be long-term structural undersupply.