Excess liquidity: two words to describe the current state of play for Asian real estate investors. For institutional investors, sovereign wealth funds and domestic businesses alike, seemingly bottomless cash reserves appear to be de rigueur. Of course, such vast reserves cannot be left to sit unoccupied and thus need to be ‘put to work’.
I have previously discussed the continued wide spread between sovereign bonds and yields with regard to investment in UK real estate, and Asia is no different in this respect. As such, more and more Asian investors are looking to the real estate market to drive value for their swathes of cash.
For example, last year the Government Pension Investment Fund of Japan – the world’s largest pool of retirement savings – announced that it would allocate 5% of its significant ¥156 trillion (US$1.37 trillion) holdings in alternative assets such as infrastructure projects, private equity and real estate; an impressive US$65 billion now added to the market place. Recent Preqin research further shows that the number of active Asia-based real estate investors has grown by 59% since 2015.
Within the UK market, last year we saw Chinese investment comprise some 32% of total investment in London real estate (up from approximately 3.4% in 2012). Some of the UK’s biggest real estate purchases of 2017, namely the ‘Walkie-Talkie’ and the ‘Cheesegrater’ skyscrapers, were funded with Chinese money. More broadly, 2017 saw US$35.5 billion of Asian capital flow into Europe, the Middle East and Africa while, in total, investors across Asia put US$83.4 billion into overseas commercial property.
While global markets will certainly continue to be of interest to Asian investors, many are looking to domestic markets to achieve their target returns. A variety of factors are playing a role in this trend, including the restrictions on outflows of domestic capital from China. With over US$3.1 trillion in reserves there is no shortage of liquidity in China and the government’s tightening controls have resulted in a redirection of domestic capital into an already tight property market.
Preqin has highlighted a strong domestic bias in Asian private equity real estate (“PERE”), with roughly four-fifths of Asian PERE deals since 2013 completed by fund managers based in the region. Preqin’s research data also shows that, since 2016, Asia-based managers have generally completed larger deals for Asian assets than international fund managers, “perhaps as local knowledge and networks allow Asia-based managers access to high-profile property.”
According to RCA data highlighted in PwC’s 2018 Emerging Trends in Real Estate, 2017 in the Asia-Pacific region was a record year for investment in income-producing real estate, with total annual transaction volumes reaching US$158 billion. Singapore saw its highest levels of activity in a decade, while Hong Kong saw its site sales jump 78% to a record US$21.4 billion. Meanwhile, Japan recorded a 3% uplift in real estate investment activity, “reinforcing its status as a destination for yield investors due to the healthy spread between current yields and the country’s super-low sovereign bond prices.”
Beyond a general trend towards real estate investment, also in similarity with the rest of the world is the rise of the alternative property asset in Asia. Recent research from Jones Lang LaSalle (“JLL”) highlights the fact that the Asia-Pacific alternatives market, despite being relatively immature compared to Europe and the US, is set to attract an increasing number of investors – including REITs, equity funds, managers, operators and developers.
Factors such as the growing population in the region will mean greater demand for assets like education centres, purpose built student accommodation and self-storage assets. JLL is estimating yields on certain alternative asset classes as being around 4 to 7% in the region, while yields on core assets remain much lower. Data centres are also a key asset class and interest is growing steadily. Oracle recently announced it will open 12 new data centres globally, half of which will be in Asia.
That’s not to say that other asset classes will be forgotten about, of course. Last year CBRE reported some “green shoots of recovery” in the retail market, particularly in Singapore and Hong Kong, while the recent Preqin data reveals that retail and office space have collectively accounted for around half of Asian PERE deal flows since 2013. Meanwhile, PwC reports steady rises in the demand for office space, in particular shared workplaces, with co-working operators constituting “the biggest demand driver for new office space in many cities across the [Asia-Pacific] region.”
As we progress further into 2018, it will be interesting to see how trends in Asian real estate investment continue to develop and evolve. What seems clear is that real estate assets, whether domestic or international, core or alternative, will continue to feature firmly on the Asian investor’s radar.