Operational friction holding back Apac data-centre deal flow as investors turn selective: report
New economy assets are favoured for high potential, but regulatory complexity, talent shortages and competition could weigh on returns
[SINGAPORE] Asia-Pacific investors are flocking to high-potential data centres and logistics real estate, but operational friction such as regulatory ambiguity and a talent crunch is hampering deal flow and could weigh on returns.
A survey conducted by corporate service provider Vistra and the Asia Pacific Real Assets Association (Aprea) showed the logistics and industrial sectors, as well as data centres, were the “undisputed leaders” for upside potential across all investor types.
They were followed by a second tier of “promising sectors” that include residential, multifamily and build-to-rent, and infrastructure.
Chris Day, Vistra Fund Solutions’ head of Apac for fund solutions and service delivery, said: “What we see is a strong pivot towards value-add, sector-specific and opportunistic strategies, especially in logistics and data infrastructure. The capital is there; investors are just getting more selective about where it flows.”
Markets where respondents saw the most growth potential include the developed hubs of Singapore, Australia and Japan, as well as high-growth emerging markets such as India and Vietnam.
Singapore, in particular, was viewed as a “high opportunity, lower friction” hub, as the primary base of operations for some 88 per cent of respondents – many of whom are drawn to its stability and clear legal framework.
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But the Republic’s popularity “creates its own friction in the form of intense competition for deals and talents”, with 21 per cent of respondents finding it difficult to hire and retain talent in fund administration in the city-state.
Respondents were mixed about uncovering investment opportunities in Apac’s real asset market over the next one to two years: 39 per cent remained neutral and 36 per cent were “slightly optimistic”. Another 13 per cent were “highly optimistic”, and the remaining 12 per cent were “slightly or highly pessimistic”.
“This suggests investors are proceeding with care rather than unbridled enthusiasm,” said Vistra and Aprea.
The biggest operational challenges were overwhelmingly regulatory and political – such as navigating complex and unclear regulatory environments or those with political risk, as well as bureaucracy in the investment process.
Partnership and execution risks arising from a lack of transparency and reliance on local partners, among others, were also a significant concern for investors.
For data centres and logistics properties specifically, operational challenges were not so much in demand but in execution. This is especially given high construction costs, a need for specialised operational and technical expertise, and intense competition for viable sites.
More than 100 C-suite members of Aprea, ranging from institutional investors to family offices, and clients of Vistra, were surveyed on cross-border investment trends.
Other sectors with fairly high opportunities for upside potential include hotel turnarounds and healthcare or senior housing.
At the bottom of the rankings were the office and retail sectors, which Vistra and Aprea said suggests a “continued struggle” for such traditional asset types.
For the residential and build-to-rent sectors, friction was mainly regulatory and related to its development – for instance, zoning laws, construction management, and in some markets, the risk of rental caps or other government interventions.
In the office and retail sectors, friction was cited not in managing growth, but managing decline or transformation. This could involve high costs for asset repositioning or retrofitting, navigating lease renegotiations with tenants, and dealing with persistent vacancies, for example.
“The potential reward is not currently seen as justifying this friction for most investors,” said Vistra and Aprea.
They further noted that investors were increasingly shifting towards value-add and opportunistic strategies, especially in “high-friction but high-upside” markets such as Japan, China, India and Vietnam – “where tax complexity, regulatory opacity and talent shortages remain persistent barriers”.
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