Office, retail, industrial properties underpin Asia-Pacific investment bonanza

Singapore

ANOTHER bumper year could be in store for real estate investment sales in the Asia-Pacific (Apac) region, with Singapore, South Korea and Australia among the hotspots wooing swathes of capital.

After the pandemic-induced blip in 2020, deal volumes rebounded in 2021 and are gearing up to sustain the growth momentum next year, market participants told The Business Times (BT).

Figures from Real Capital Analytics (RCA) showed that within Apac, acquisitions of income-producing properties this January to November reached a record US$167.38 billion, up 24 per cent year on year and a 1.5 per cent increase from the same period in 2019.

The year-to-date tally is also 16.3 per cent above the average for the January-November period in the 5 years before the pandemic.

The pipeline of pending deals in Apac as at end-September 2021 exceeded US$68 billion, double what it was 2 years ago.

David Green-Morgan, RCA's managing director for Apac, noted: "We are not just seeing growth over 2020, but also above the long-term average, meaning that 2021 could be a record year and continue the longer-term expansion of the investment market in Asia-Pacific."

RCA's head of analytics for Asia, Benjamin Chow, said the growth in the region has been "broad-based and well-distributed across the office, retail and industrial sectors".

Cushman & Wakefield (C&W) predicts investment volumes in 2022 to match the record levels seen in 2019, at around US$180 billion.

"On the upside, total volume in Apac may exceed the US$180 billion forecast, should sufficient high-quality assets or large portfolios be brought to market," said C&W.

Key drivers include still-low interest rates despite modest increases in the past year, real estate as an inflation hedge, a record amount of dry powder, and an intensified focus on capital deployment by investors, C&W added.

Shirin Tang, managing partner of law firm Morrison & Foerster's Singapore office, told BT: "As we move into 2022, competition for real estate deals remains stiff and bids high across the Asia-Pacific."

One reason is the sheer amount of capital targeting real estate in the region.

"2021 saw robust fundraising activity with a large number of blockbuster funds reaching final close in Apac," she said.

And many more are still on the road looking to secure investor commitments.

Private Equity International data indicated that as of October 2021, Apac-focused private equity real estate funds were targeting to raise US$37 billion.

"As these funds begin to close, shoring up the asset class with ever more investment firepower, and with credit markets expected to remain relatively accommodative, we see transaction volumes remaining strong," Tang said.

Stuart Mercier, managing director and head of Asia at Brookfield Asset Management, said sellers are either facing balance sheet stress or looking to more strategically allocate capital into their core business.

"When buying in Australia, we are currently being driven by scarcity of top-quartile product, with very attractive yield spreads available relative to most global gateway cities," he added.

And increasingly, buyers are looking for a more attractive alternative to traditional fixed income, Mercier said.

Ralf Wessel, managing director of fund management at logistics behemoth GLP, noted that the gap between how much capital institutions have set aside for real assets and how much they have actually invested in the asset class "has never been wider".

He observed greater interest in perpetual-income vehicles to meet growing investor demand for long-term exposure to high-quality, core assets.

"Investors are looking for strong and reliable income streams and focusing more on tenant quality and lease duration," Wessel said.

Tang pointed out that rising capital flows from institutional investors and asset owners have targeted properties in established gateway cities such as Singapore and those in Australia, Japan and South Korea, especially when it comes to recovering Grade A office and retail property investments.

"The appeal of safe-haven markets amid persistent economic uncertainty is a big draw. In addition, despite the slow easing of travel restrictions and virtual due diligence becoming part of the new normal, cross-border purchasing activity has continued to support intra-regional deal activity," she said.

Brookfield's Mercier described Singapore as "the shining light in South-east Asia", following a successful Covid-19 response and tempered strategy.

The Republic will be an attractive hub for multinational corporations as they reconsider their regional footprint and need for headquarters situated in a city with a predictable and efficient travel policy, he added.

Elsewhere in the region, South Korea remains an area of increased institutional focus, while Australia has proven itself a resilient market with excellent long-term growth fundamentals, Mercier said.

"There is a weight of capital both onshore and offshore looking to increase allocation to core sectors including office, retail and industrial, and we continue to see strong demand in alternative asset classes, however it remains very difficult to deploy at scale," he added.

C&W noted that a greater focus on industrial assets may dampen the average deal size, even as the overall investment market will likely stay highly active.

Hence, greater transaction activity may not necessarily result in higher overall deal volume.

For Brookfield, the asset manager's investment approach in Asia partly focuses on sectors that are more opportunistically challenged.

These include hotels, retail and, selectively, office properties, which have faced occupancy, traffic and capex challenges due to the pandemic, either directly to the asset itself or to the sponsor.

"In all these instances, we are looking to acquire high-quality assets at a discount to their replacement cost, that can benefit from some operational expertise," Mercier said.

Another key theme for Brookfield in the region is centred around logistics and multifamily rentals.

The latter is a global theme reflective of the shortage of affordable housing, particularly in urban gateway markets, Mercier said.

Morrison & Foerster expects asset managers and investors to be increasingly focused on identifying and driving value in target assets.

This comes as competition for assets has led to compressed margins, with valuations marching further upward for high-quality opportunities across the region.

Said Tang: "Value can definitely still be found, but asset owners in Asia-Pacific are paying closer attention to the fundamentals and establishing value-enhancing plans early."

In support of this effort to unlock value, dealmakers are getting more creative and sophisticated with deal structures to secure attractive entry points, she added.

Direct and co-investments have grown in popularity, as has the appeal of build-to-suit and greenfield developments in the case of industrial assets, for instance.

Tang has also witnessed rising demand for investments in property managers and operators.

"For investors, it's an opportunity to secure valuable access to a pipeline of deals. For experienced asset managers, such partnerships with local operators offer an opportunity to venture into new geographies while mitigating risks," she said.

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