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REAL ESTATE
Things are not the same: The state of Asia Pacific's real estate
by Nicholas Wilson
12 Jan 2020
12 Jan 2020
It’s been more than ten years since the global financial crisis. Since then, the number of real estate investment deals of over US$500 million has more than tripled, and cross-border investment volumes are at a 10-year high.
This comes off the back of cautious yet hungry investors looking for yield during the time of low interest rates globally as a repercussion of the global financial crisis. Gradually, their appetite grew as debt remained cheap and they shifted their attention to assets with higher risk and higher return, such as real estate.
In fact, by the end of 2018, global real estate assets under management hit US$3.2 trillion. With monetary policies remaining lenient, we observed four key ways in which Asia Pacific real estate has changed since the global financial crisis.
- DEALS INCREASED IN COMPLEXITY AS INVESTORS BECOME MORE RISK AVERSE
- REITS GAIN POPULARITY
- PROPTECH FUELS M&AS
- CROSS-BORDER CAPITAL INCREASES
This year’s Asia Pacific real estate transactions through joint ventures will likely reach over US$35 billion, helping investors diversify their holdings across various asset classes. Secondary market transactions, which represent the purchase of an existing investors stake in a fund, have also gained in popularity.
Such transactions often allow the investor to acquire positions at a discount to the net asset value of the underlying assets, in part to reflect the value of liquidity of such stakes. A further benefit is that it enables the buyer to gain exposure to mature portfolios and avoid the so-called “J-curve” of real estate fund investing, where the costs of initial investments impact returns in the early years of a fund's life.
Local knowledge and specialist skills have become even more crucial as the investment community seek yield and value in an increasingly global market. Sellers and buyers looked to minimize risks and increase competitive advantage, thereby increasing the number of joint ventures and secondary fund transactions.
- DEALS INCREASED IN COMPLEXITY AS INVESTORS BECOME MORE RISK AVERSE
- REITS GAIN POPULARITY
- PROPTECH FUELS M&AS
- CROSS-BORDER CAPITAL INCREASES
REITS gain popularity
REITs have increased in popularity in the ultra-low interest rate environment where bond yields are low. Strong long-term total returns, combined with other key investment characteristics such as liquidity, high dividend yields, and their potential to increase diversification and to hedge against inflation, have contributed to their appeal.
Between 2009 and 2019, the Asia Pacific REIT market capitalization has more than quadrupled to US$416 billion. There are currently about 258 REITs listed in the region, compared with 152 in 2009.
While Japan remains the biggest market for REITs in the region, developing countries across Asia Pacific are picking up pace. India’s Embassy REIT, backed by the Blackstone Group, made its debut last year, while China and the Philippines are looking at introducing REITs to help fund domestic real estate developments.
- DEALS INCREASED IN COMPLEXITY AS INVESTORS BECOME MORE RISK AVERSE
- REITS GAIN POPULARITY
- PROPTECH FUELS M&AS
- CROSS-BORDER CAPITAL INCREASES
PropTech fuels M&As
In the last decade, cheap financing, the increased globalization of the marketplace, and rapid technological advancements have led to a rise in M&A activity in the real estate sector. The rise of PropTech, for instance, has seen traditional real estate firms buying startups to gain market share quickly.
Rapid developments in the e-commerce sector have also made industrial properties with warehousing capabilities popular M&A targets.
Some of the biggest transactions in the logistics space included Nesta Investment Holdings’ acquisition of Singapore-based Global Logistic Properties, Asia's biggest warehouse operator, for $16.4 billion and Blackstone’s sale of European logistics and warehouse giant Logicor to China Investment Corp for US$13.8 billion.
We think that firms will continue to assemble managers and operating companies as they try to develop products that appeal to investors to take advantage of the capital available since most are still underinvested in real estate generally.
- DEALS INCREASED IN COMPLEXITY AS INVESTORS BECOME MORE RISK AVERSE
- REITS GAIN POPULARITY
- PROPTECH FUELS M&AS
- CROSS-BORDER CAPITAL INCREASES
Cross-border capital increases
As investors increasingly struggle to find a home for rising real estate allocations, they are looking further afield in the hunt for yield.
Asia Pacific’s share of cross-border deals reached a 10-year high, rising from 14.1 percent in 2009 to 34.2 percent in 2019. Buyers from the region transacted some US$54 billion worth of cross-border deals in 2019 (year to date), up from US$10 billion in 2009.
In 2018, as China struggled with its tariff dispute with the U.S., Singapore replaced the Chinese mainland to become the biggest source of outbound capital in the region. In 2019, Singaporean real estate investors remained the region’s top cross-border spenders, splurging approximately US$10 billion on overseas properties in the first half of this year, with their deals growing in scale and complexity.
Mr. Nicholas Wilson is Head of Capital Markets Research APAC at JLL.
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