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INVESTMENT

Strong investment liquidity set to fuel investment market; investors advised to focus on asset enhancement to reach return targets amid tight yields and interest rate uncertainty; price dislocation in office, retail and hotel sectors offers opportunities as market nears trough.

 

 

 

Investment Volume Projected To Reach Record High


The strong rebound in Asia Pacific commercial real estate investment volume in 2021 was largely driven by pent-up demand from the previous year, when many investors suspended purchasing following the onset of the COVID-19 pandemic. Market sentiment will remain upbeat in 2022, with investors still possessing ample capital for deployment.

Asia Pacific-focused close-ended real estate funds are expected to be active this year amid the continued strong fund-raising environment, which has seen them raise US$83 billion of equity since 2018. REITs and institutional investors (such as sovereign wealth funds, insurance companies and pension funds) remain cash rich, possessing around US$16 billion and US$500 billion of equity3, respectively, on their balance sheets for future investment.

Total investment volume in 2022 is projected to increase by 5%-10% over 2021 levels, reaching a record high US$150 billion.

Logistics assets will remain keenly sought after, while interest in offices is expected to strengthen this year, supported by the return to the office and improving real estate fundamentals. Demand for retail and hotel assets will take longer to recover following the emergence of the Omicron variant of COVID-19 and the reintroduction of tighter border controls and social distancing regulations in many markets. However, CBRE observed several investors acquiring assets in these two sectors last year by forming joint ventures with operators to take advantage of price dislocation, a trend that will continue in 2022.

Figure-15
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3 These figures are based on cash and cash equivalents reported in the financial report of the listed REITs and insurance companies in Asia Pacific and other third-party information vendors


Yield to Remain Low


Overall office yields are expected to hold firm in 2022 as investors return to the sector. Selected cities such as Beijing, Shanghai, Sydney and Singapore will experience mild downward pressure on yields as rents either stabilise or enter the upward cycle.

Yields for retail assets will be stable overall but those for well-located malls and neighbourhood shopping centres are expected to compress. Investors possessing operational excellence will continue to find value in this asset class, especially in Australia, Japan, Hong Kong SAR and mainland China.

Strong capital flows into the logistics sector have pushed down yields significantly over the past two years. While yield compression is expected to continue in 2022, the pace will be milder as investors adopt a more cautious stance towards the outlook for leasing demand and the future supply pipeline. The yield spread between office and logistics is projected to narrow further to less than 30 bps in 2022.

With the prime yield spread between three sectors having narrowed over the course of 2021, income growth will become an important driver of value. Active asset management and enhancement are set to take on a more prominent role in generating rental income.

Figure-16 click to enlarge

 


Stronger Focus on Asset Enhancement


More stringent regulatory and corporate requirements will continue to encourage investors to include ESG criteria in asset enhancement initiatives, especially in the office sector. Particular focus will be given to upgrading buildings by reducing energy consumption and introducing health-related features to address pandemic-related concerns. In addition to hardware upgrades, enhancing user experience will be another focus, with property owners offering a wider range of rent-generating amenities such as areas for employees to relax and socialise.

Repositioning will be another popular asset enhancement initiative in 2022. With yields for traditional assets remaining tight, investors will seek opportunities to partner with experienced operators to reposition properties to alternative use.

Figure-17
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Source: Exploring office enhancement strategies, CBRE Research, September 2021. [Link]



"With Asia Pacific commercial real estate capital values set to hold firm in 2022, fuelled by competition for quality assets, CBRE has identified three conformist and three contrarian investment strategies for investors to consider."


Conformist Investment Strategies


Focus on greenfield and brownfield logistics opportunities in emerging locations

CBRE’s 2021 Asia Pacific Logistics Occupier Survey found that 78% of logistics occupiers intend to expand their logistics space in the coming three years. Their preference will be for tailor-made solutions by leasing build-to-suit facilities; partnering with investors to develop brand new properties; or acquiring land to develop their own assets. Investors are advised to engage anchor tenants to identify build-to-suit opportunities.

Upgrading older but well-located logistics facilities will be another means for investors to tap into solid leasing demand for good quality warehouse space near major transportation hubs. While current vacancy rates for logistics facilities are low, standing below 3% in 14 out of the 16 cities tracked by CBRE, investors are advised to carefully select submarkets with a limited supply pipeline including southern Seoul, Shanghai’s Jiading and Minhang areas, Melbourne and Brisbane for redevelopment opportunities.

With proximity to markets and consumers top of the occupier agenda, recent years have seen stronger demand for logistics facilities near megacities. Transportation costs typically account for 50% - 70% of total supply chain costs, underlining the importance of site selection. Emerging logistics areas and hubs such as Beijing Da Xing Airport and Seoul Incheon Airport are close to megacities and are increasingly attractive from a connectivity and cost effectiveness point of view.

Selectively choose turning office markets

Thanks to ample flight to quality demand, well-located high quality office properties have withstood market weakness throughout the pandemic. The introduction of hybrid working has also not had a significant impact on office demand in most Asia Pacific markets. Singapore and Seoul will remain the primary focus for office investors in 2022, supported by rental growth and limited availability. Investors should consider value-added opportunities such as upgrading well-located lower grade office buildings to meet future tenant demand.

Investors with longer holding periods are advised to focus on markets reaching a turning point, such as Beijing, Shanghai and major cities in Australia. With these markets likely to start recording mild rental growth in H2 2022, there will be attractive opportunities for investors with a five-year holding period.

With technology companies expected to remain resilient in terms of revenue growth, they will continue to display robust leasing demand, especially in mainland China and India, where authorities are providing policy support on research and development (R&D) and innovative technology.

Consider emerging multifamily markets

While Japan remains the primary destination for multifamily investment, Australia’s build to rent market is attracting increasing attention from international insurance companies and pension funds looking to partner with local developers. Although immigration flows have been impacted by the pandemic, arrivals will pick up rapidly when borders reopen, with capital cities set to benefit. Prior to the pandemic, more than 80% of net overseas migrants opted to base themselves in state capitals. Elsewhere, build-to-rent residential is gaining traction in mainland China, particularly in tier I cities, where housing affordability is a major concern. However, regulatory hurdles continue to impede the development of the multifamily sector in these markets.

Hong Kong SAR is attracting interest from investors looking to purchase hotels for conversion into co-living space in urban areas. This segment is attracting strong end-user demand from young professionals wanting to move out from the family home to their own private spaces closer to work.


Contrarian Investment Strategies


Don’t overlook hotels

While the slow resumption of international travel has delayed the hotel market recovery, pent-up travel demand will be unleashed when borders reopen. Many investors are already anticipating this trend, with 2021 witnessing an uptick in investment activity in the hospitality sector in Japan and Australia.

Resorts and leisure hotels have benefitted from strong local staycation demand. CBRE believes urban hotels will offer opportunities along with the return of business travel facilitated by travel bubbles and fast-track arrangements for vaccinated individuals. Recognising these opportunities, an international fund manager recently acquired a city centre hotel in Osaka, marking its first hotel purchase in Japan.

Revisit core retail

While pandemic-related social restrictions and border controls continue to weigh heavily on the retail sector, retailers remain willing to open new stores or secure quality space in core locations, highlighting the investment appeal of prime shopping malls. Selected investors with retail management expertise view the current downward trend as an opportunity to buy well-located retail facilities. Prime shopping malls in Japan, mainland China and Australia as well as high street retail in Hong Kong SAR will offer opportunities to investors willing to consider this sector.

Explore secondary retail in prime districts

With secondary retail taking longer to recover amid subdued leasing demand, there will be opportunities for investors to negotiate more attractive pricing by taking on vacancy risk. Investors are advised to carefully select assets along secondary high streets in prime locations for leasing to F&B retailers, who are less vulnerable to the rise of e-commerce. Tokyo, Hong Kong SAR and Seoul offer the most appealing prospects.

Asia Pacific Real Estate Market Outlook 2022

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Greg Hyland
Head of Capital Markets
Asia Pacific
Capital Markets
+65 6224 8181
+65 9818 1537
+65 6225 1987
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Dr. Henry Chin
Global Head of Investor Thought Leadership
& Head of Research, APAC
Research
+852 2820 8160
+852 2810 0830