Expect China to keep investing overseas; plus new sector prospects and bigger deals ahead
This has been a year marked by major events such as Brexit, the U.S. presidential election and, most recently, China’s announcement that it is monitoring capital outflows. But the real estate sector remains robust despite some short-term market volatility.
“There has been a lot of capital around in 2016, with new investors attracted to Asia whether they are large sovereign funds, pension funds or Chinese insurance companies. These investors are allocating capital to real estate,” says Stuart Crow, JLL’s Head of Asia Pacific Capital Markets.
The year has also seen active investors coupled with cautious corporate occupiers. “The outperformance of capital values compared with rents has pushed core yields to new lows in many markets across Asia Pacific,” says Dr Megan Walters, Head of Research, JLL, Asia Pacific. “But the overall commercial real estate investment market should remain stable in 2017, as we expect continued institutional appetite for real estate in the region but an ongoing shortage of stock.”
As 2016 comes to a close, JLL identifies five trends to watch out for in Asia Pacific in the year ahead.
1. China to continue investing overseas
In Q3 2016 China overtook the United States to become the largest cross-border real estate investor, having invested nearly US$18 billion into commercial property assets internationally in the first three quarters of this year.
In November, news broke that China is taking a more cautious stance to capital outflows, curbing overseas investments of more than US$10 billion and mergers and acquisitions valued at more than US$1 billion if they are not part of a company’s core business. JLL predicts some short-term impact on the more high-profile deals.
“Investing overseas is a strategic move for most Chinese investors,” says Crow. “While there may be some short-term slow-down or delay, we expect few long-term structural changes. The trend of Chinese capital going out for real estate is not stopping. If anything, it is going to gather momentum due to the enormous capital base in China.”
2. New sectors on the rise
Investors remain positive about their prospects for 2017, but are on the hunt for value. “Finding value is challenging. As a result, investors will increasingly look for value in off-market deals, newer and secondary cities as well as newer sectors,” says Dr Walters.
A number of alternative sectors are looking attractive. Self-storage, for example, offers investors exposure to the growing number of consumers who live in compact homes and require separate storage space. Meanwhile, on the back of the rapid growth of e-commerce, the logistics sector is also gaining in popularity. An increase in demand for data centres, propelled by the adoption of cloud computing and big data, means that canny investors are considering that sector too.
3. Country opportunities
Investors are looking at Southeast Asia for 2017, in particular Vietnam. Its real estate sector saw a 12 percent year-on-year increase in investment. It is forecast to grow with favourable conditions such as greater market transparency and a projected GDP growth of about 6 percent, in keeping with growth rates this year.
Mature markets Australia and Singapore are still attractive. “Investors like Australia because of its transparency and higher yields,” says Crow. “For Singapore, in what has traditionally been a volatile market, investors are seeing the current entry point as an attractive one.”
4. More and bigger deals to continue
This year saw several significant highlights in terms of transactions: Qatar Investment Authority, buying Asia Square Tower 1; Century Link complex in Shanghai’s Pudong district being sold for U$2.96 billion to Beijing-based insurance company China Life; and Brookfield Asset Management acquiring the International Finance Centre Seoul for US$2.7 billion.
“There is every indication that this trend for big ticket deals will continue into 2017,” says Crow. “The prospect of most central banks keeping interest rates low for an extended period means capital continues to be deployed into real estate investment. This will help buoy corporate occupational demand and rent performance. Yields in core asset classes will remain stable because of investor demand.”
5. The post-Brexit and Trump effect
The shocks of Brexit and the U.S. presidential election have not caused any significant changes in the real estate market in Asia Pacific, despite some short-term currency volatility.
“Regional commercial real estate transactions held up remarkably well during Q3 2016, despite market volatility after Brexit,” says Dr Walters. “By volume, activity across Asia Pacific in the first nine months of the year was stable compared to the same period in 2015. Midyear, we saw capital flows to Europe slow down and outbound capital flow to the US. Following Brexit, there have been several big deals done by Asian investors in the UK, brushing off uncertainty. With regards to President-elect Trump, there is some potential for stock market and currency volatility, as well as political risk due to geopolitical tensions. This may drive the world’s largest investors to increase their allocations to the asset class because of real estate’s safe haven nature and diversification benefits plus relatively higher returns.”