For the last several years, real estate markets across the Asia Pacific have been shaped by a number of external forces that are continuing to drive capital toward particular types of asset classes and geographies. On the one hand, as bond rates sink ever lower, real estate becomes increasingly attractive as a means to deliver returns that fixed-income markets can no longer deliver, driving up prices of core assets and creating intense competition in what is now a crowded field. On the other, fund managers with a mandate to deliver a certain level of return are being forced into uncharted waters as they seek out yield.
The main takeaways from this year’s Emerging Trends report include the following:
- Low transaction volumes in the first six months of 2016 reflect a shortage of available assets in major markets, in particular Tokyo, as owners opt instead to refinance properties at lower rates instead of selling them. In general, investors are reporting fewer overall transactions but bigger ticket sizes.
- At the same time, yields continue to fall, although at a slower rate. Looking forward, while most investors see potential for some further compression—mainly as a result of the sheer weight of new capital being pointed at the sector—the trend may be reaching its limit, especially given weak rental growth prospects in most regional markets (Australia excepted).
- Core assets continue to be the favored asset class, although product is becoming increasingly hard to source. One way around this is for investors to assume development risk by pursuing “build-to-core” projects. Although these are not traditionally considered a core strategy, many core investors are now willing to adopt this approach, especially when it involves buyers such as insurance companies that are likely to be long-term holders of the end product.
- Investors with a mandate for higher return strategies continue to migrate up the risk curve, both in terms of sectors—pursuing niche strategies such as sub-logistics facilities or data centers—and geographically, with emerging markets such as India drawing increasing attention.
- Investments in metropolitan areas have become a popular theme given ongoing trends of urbanization, land shortages in city centers, and low returns from central business district projects. Cities across the Asia Pacific including Sydney, Shanghai, Mumbai, and Jakarta are engaged in major transportation construction projects that link suburbs or satellite towns to city centers.
- In line with markets in the West, Asia is embracing the shared economy. The last 12 months have seen huge growth in the adoption of shared workspaces, either as standalone businesses that rent open-plan office facilities to individual or corporate users, or on a corporate basis, as large companies scrap conventional office layouts and embrace hot-desking and collaborative working environments. On the residential side, shared spaces are also becoming more prominent as rising prices continue to shrink apartment footprints.