Executive Summary
Investor sentiment across many markets in Asia has grown increasingly uncertain toward the end of 2012, with concern over fading global economic prospects tempered by ongoing strength in asset pricing and persistently compressed yields. The lack of conviction has been highlighted by the divergent approaches of foreign and local investors to property pricing, with Asian buyers often willing to pay up for properties at rates foreigners find prohibitive.
Given the ambivalent mood, it comes as little surprise that investors are opting for bigger, more liquid markets where there are plenty of core assets and greater confidence in long-term price stability. Tokyo and Australia, therefore, have been particularly favored. The former has benefited also from ultra-low interest rates and a widespread belief that pricing is about to bottom out, while the latter continues to feature high yields, a shortfall of domestic capital, and a growing conviction that homegrown institutional investors are about to increase investments in real estate assets.
Opportunistic investors, meanwhile, are having a hard time finding assets that will provide returns that Western-based investment committees expect from this type of play. Some possibilities exist, however. Many foreign investors are looking for Japan to produce distressed assets, especially from commercial mortgage–backed securities servicers. Australia has seen some distressed portfolios coming to market (especially from European banks), while China also offers possible distress plays from cash-strapped developers in need of capital to complete projects.
The difficulty in sourcing good returns has meant that investors have become more adventurous in seeking out yield, with particular interest in niche sectors such as logistics and seniors’ housing facilities, as well as assets in secondary locations such as Indonesia, Malaysia, Thailand, and China’s secondary cities. Indeed, all these emerging locations ranked at or near the top of the Emerging Trends survey of top investment and development destinations.
On the financing side, Western-sourced capital remains below precrisis levels, and fundraising today is focused increasingly on tapping sources from within Asia. Therefore, not only is Asian real estate investment now dominated by Asian capital, but also a growing proportion of capital finding its way into global real estate funds for investment in Western markets is being raised from within the region.
Indeed, the volume of new regional capital sourced from big institutional players, including sovereign wealth funds, is becoming increasingly apparent, with funds from every major Asian economy now either actively deploying capital outside their home markets or planning to do so. Sovereign wealth funds from outside Asia are also active in the region now, with some opening their own offices in order to invest directly.
Bank lending remains the major source of Asian real estate finance, as it has been traditionally. By and large, leverage in the 50 to 60 percent range remains both widely available and fairly cheap (if marginally more expensive than last year). There are a couple of notable exceptions—in particular China, where the government remains committed to reeling in local home prices by keeping a tight leash on bank lending to developers.
The capital markets, meanwhile, have seen widely contrasting fortunes. With share prices down substantially across the region, few developers have had any incentive to raise equity. On the debt side, the story has been quite different, with Asian markets raising more real estate debt in 2012 than in any previous year. Cost of debt for investment-grade players is commonly below 5 percent for 30-year terms. In the second half, the focus shifted to the high-yield side, with Chinese developers prominent in the market. Finally, Asian real estate investment trusts (REITs) have also seen exceptional demand since around the middle of the year. With share prices rising strongly, many REITs across the region now trade at a premium to net asset value. Although yields have been compressed, they remain generally competitive compared with cap rates for individual properties in most markets. Because REITs are now more easily able to make accretive purchases, many interviewees anticipate they will be active buyers in 2013.
In the Emerging Trends Asia Pacific investment prospects survey, respondents nominated several second-tier markets among the top choices, as noted above. In addition, Shanghai, Singapore, and Sydney were preferred destinations. While the popularity of the more developed markets comes as no surprise, the choice of Jakarta as top pick is perhaps unexpected. Certainly, Indonesia has turned in strong economic performance in the last couple of years, and office rents in particular surged in 2012. Still, Jakarta lacks the enterprise, scale, and infrastructure of its more developed peers, and—perhaps more important—lacks the capacity to absorb large amounts of real estate investment. In the Emerging Trends Asia Pacific sector-by-sector ratings, industrial/distribution remains the top-rated prospect for the second year in a row, followed closely by retail, hotel, and office assets.
