Property investors in Asia Pacific are primarily concerned with yield spreads.
In 2017, we’re moving away from capital appreciation strategies.
According to CBRE, investors in Asia Pacific real estate are still focusing on yield spreads while looking for assets to invest in, and are moving away from capital appreciation strategies. qatar real estate
The quest for yield is causing investors to steer capital towards mature regional real estate markets like Australia and Japan, according to CBRE Research’s recently published study, New Channels for Old Favorites, yet to gradually diversify away from conventional markets like Sydney, Melbourne, and Tokyo.
“The investment landscape for Asia Pacific real estate has changed dramatically in the last decade,” says CBRE’s Asia Pacific Director of Research, Robert Fong. “A combination of new entrants, the rise of first-time cross-border investors, and a broader presence of institutional investors has not only increased capital volumes, but has also significantly changed the structure of this industry.”
The quest for yield can be attributed to wider involvement of institutional investors, such as sovereign wealth funds (SWFs), insurance firms, and pension funds, according to CBRE Research, who collectively invested US$22.5 billion in Asia Pacific real estate between 2013 and 2016. With the loosening of outbound investment regulations for insurance companies in China, Taiwan, and South Korea, CBRE Research expects a continued interest in high-yielding, longer-term returns to match liabilities.
In 2017, investors seeking yield are turning their attention to Australian real estate properties. Sydney and Melbourne continue to be popular destinations for investors looking for high-yielding investments. Strong fundamentals, robust liquidity, and market transparency mean that both cities will remain attractive investment destinations, but due to lower volatility and stabilizing rental markets, cities like Brisbane, Adelaide, and Canberra will benefit from competition for limited assets.
“The attractive commercial yield spreads in Australia’s two largest cities affirm their position as one of Asia Pacific’s most sought-after investment markets. Investors are now more likely to step up the risk curve into less common but stable markets like Brisbane, owing to heavy competition and restricted available stock in Sydney and Melbourne “Fong explains.
Because of its high commercial yield range, Japan remains appealing to real estate investors in 2017. According to CBRE Research, investment demand has been concentrated in Tokyo due to strong rental growth and stable liquidity, but it will likely peak and correct as new supply enters the market in 2017–18. Given this context, CBRE sees a diversification trend towards Japan’s regional cities, such as Osaka, Fukuoka, and Yokohama, in its interactions with investors, guided by factors such as 150bps higher yield premiums compared to Tokyo and lower rental vacancies.
“Japanese real estate is a well-established asset class for regional and global investors,” says Tom Moffat, Executive Director, Capital Markets, Asia, CBRE. “The continued competition to invest in Tokyo real estate, combined with positive fundamentals in regional markets, is causing more investors to take a closer look at regional cities.”
Investors focused on the mature Australia and Japan markets, according to CBRE Research, must control their quest for yield with a good risk management system. CBRE has defined three areas of risk facing investors in the medium term, with more attention being paid to yield spreads versus capital appreciation in Australia and Japan investments.
Investors chasing yield in Australia and Japan are more vulnerable to liquidity risk, especially during market downturns. Investors are turning to funds with longer investment horizons or alternative exit strategies, such as converting closed-ended funds to open-ended funds, to avoid being forced to exit investments during periods of low liquidity and high market volatility, according to CBRE Research.
Currency danger: Volatility in freely traded currencies such as the Australian Dollar and the Japanese Yen necessitates aggressive hedging programs to mitigate the currency risk associated with investing in both markets. Investors, on the other hand, are usually well informed about hedging moves in the Australian dollar and the Japanese yen, thanks to a sophisticated market of liquid instruments.
Investors entering mature real estate markets like Australia and Japan, as well as emerging markets like Vietnam, often choose or are expected to do so through a joint venture (JV) partnership. CBRE Research has observed investors scrutinizing the track records of prospective partners more closely and doing more rigorous due diligence to determine financial and strategic goals in order to match investment priorities and views.
“Regardless of location or asset class, investors seeking a higher yield premium are aware that higher risks are inevitable. However, the wide range of risk reduction strategies now employed by investors in markets such as Australia and Japan indicates that many intend to continue to use the yield approach in their real estate portfolios for the near future “Fong explains.
Aside from Australia and Japan, markets like Vietnam continue to entice investors with higher inherent risks and a diverse and evolving suite of hedging solutions. Although yield spreads and economic fundamentals continue to support real estate investment, the amount of investible stock is small, implying that demand is motivated by longer-term potential rather than short-term returns.
The following are some of the other themes in the Asia Pacific real estate investment space:
Diverse Entry Points: Real estate investors now have access to a wider range of possible entry points. Real estate funds continue to be common for direct, portfolio, joint venture, and indirect investments. CBRE Research sees more portfolio deals capable of securing larger exposures as institutional investor interest in the market grows.
Due to the limited supply of assets in some markets, more investors are concentrating on building and deepening relationships with local developers through JVs. Co-investments with other investors are also becoming more common in Asia Pacific as a way to gain outsized exposure to a single asset or a portfolio of assets.
Portfolio Rebalancing Benefits: To compensate for low government bond yields and interest rates, institutional investors continue to diversify their investments and pivot toward Asia Pacific real estate properties. Institutional investors seeking safe, risk-adjusted returns continue to be attracted to direct real estate investment.