News, Asia, Australia, China, Hong Kong, Japan, Korea, Singapore
By Asia Asset Management
Asian real estate continues to attract new capital, with major buyer groups firmly in acquisition mode despite the region’s gradual recovery, according to a mid-year update to its Investment Strategy Annual (ISA) report, issued by LaSalle Investment Management.
Paul Guest, head of research and strategy, Asia Pacific at LaSalle, comments: “There is a broad spectrum of capital targeting Asian real estate, with an ongoing structural shift by many Asian institutions into the sector, such as the region’s pension funds and sovereign wealth funds. In addition, listed real estate has benefitted from a variety of new equity raisings and private equity continues to see strong inflows and active fundraising. These shifts in capital allocation, both secular and cyclical, provide a constant, stable demand for institutional grade property across much of the region."
He adds: “The continued weight of equity targeting good quality real estate has led to rising prices. As a result, investors are gradually moving up the risk curve in terms of asset quality and market selection. We flagged this trend at the beginning of the year and are seeing it spread to a wider variety of sectors and locations.”
Asia Pacific outlook
The research shows that the regional economy is experiencing a gradual recovery, with confidence indicators, both business and consumer, trending upward and low-cost debt leading to a pickup in corporate borrowing. In time, these factors will lead to fixed investment and hiring, it says. The pace, however, is expected to be much slower than in previous recoveries due to numerous causes, including lingering global uncertainties, continued deleveraging in the public and private sectors, and the transition underway in the region’s principle economies, Japan and China.
Asia displays a wide range of cyclical dynamics in terms of property supply and demand. Most office and retail markets appear in the early stages of rental recovery, with the over-supply of offices in Singapore and Seoul gradually being absorbed, albeit by sluggish leasing activity. Meanwhile, residential markets in China, Hong Kong and Singapore remain subject to policy risk, with government intervention having a bigger impact on prices than underlying fundamentals.
Finally, logistics remains a sector LaSalle broadly favours given the shortage of good quality stock in markets like China, Japan and South Korea. Its major themes for property looking towards the second half of 2013 are the potential structural transformation in Japan; the impact of recent reductions in central bank interest rates set against the impact of rising bond yields and the eventual lifting of quantitative easing; and the ongoing inflow of capital to real estate from both equity and debt.
LaSalle recommend the following strategies heading into the second half of 2013:
Australia: Weak tenant demand across most markets combined with resilient pricing has led us to downgrade our view on core office investment, while maintaining that warehouse facilities connected to major ports and infrastructure offer the best core returns. For higher risk strategies, we continue to rate the repositioning/redevelopment of mismanaged convenience-based retail as well as inner-urban apartment development.
China: Our preference for logistics is unchanged: solid income and an attractive pricing gap make it ideal for core, while abundant end-user demand makes development returns appealing. Relatively little stabilised stock is available, however, so a build-to-hold strategy is potentially the best option.
Hong Kong: Increasing policy risk has made residential development strategies less appealing, leading us to downgrade our view of this sector. Our top strategy – core, stabilised logistics facilities – is unchanged but remains difficult to access.
Japan: In core, we view regional retail as relatively capital starved in the current recovery and thus offering attractive pricing, despite soft fundamentals in light of the consumption tax hike. We also favour logistics because of low vacancy rates and stable income returns. Up the risk scale, modern warehouse development remains attractive despite the increase in competition. We have upgraded our view of value-add office strategies, particularly lease-up, given current pricing for stabilised stock and abundant demand from JREITs.
Singapore: We believe the ongoing office market recovery supports appealing development and repositioning options in the main central districts. In the niche segment, a shortage of student accommodation makes this asset class attractive. For core, suburban retail and higher specification logistics remain the most attractive but are still difficult to access.
South Korea: Logistics space remains an attractive development strategy, albeit challenging to access. Entry prices for core offices are unattractive because of the preponderance of domestic core capital; however, a slow improvement in fundamentals is boosting the appeal of strategies targeting non-performing offices requiring asset improvement.