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Asian Real Estate Continues to Whet Investors’ Appetite Post-COVID

6 MIN READJune 30, 2020
Although investment halted along with all economic activity during the quarantine periods in Asia and Europe, as economies start to reactivate more and more investors are interested in the APAC region. Real estate investment trends driving urbanization and the need for real estate spaces in countries such as China and India may help ramp up economic growth if incentivized correctly. GRI Club India discussed the cross-border opportunities for investment between Asia and Europe in our latest eMeeting highlighting the opportunities and challenges investors will face post-pandemic. 

Asian Real Estate Market Status

During 1Q20, transaction volumes in APAC fell around 26%, with the outliers being Japan (large deals by Blackstone and Norges) and South Korea (driven by the strong domestic liquidity). Momentum is expected to continue in decline until 3Q20. Asian markets have been at the epicenter of global investment growth with cross-border transactions growing by 25-30%.

APAC capital has been the dominant investor both within and across the APAC region with US$35 billion of investment. There is a multiple cross flow between Asia to Europe, with maximum investments in the office sector equating to 60% of the outbound deals. In the last years, APAC has remained an attractive region for the investors due to the growth dynamics provided (30% growth over the last five years) which exceeds that of Europe and America with no expected decline due to the diversification Asian markets provide.

The main themes noticed in the Asia pacific markets are building distress, building momentum transaction values, settlement of the price discovery, strong preference for certain sectors driven by rent collection, logistics and high-market liquidity with a lot of capital on the side lines. These markets are starting to see debt investments as opposed to equity and accelerated sales from value add or opportunities funds.

Investment Scenario Asia-Europe

Asia does not seem to be slowing down as much as Europe in the past months in April and May 2020. Nevertheless, the slowdown in Europe has led to more re-pricing, varying between 5-20%, than expected. Asia continues to remain strong in the logistics segment making investors want to get in on the play. Industry players are expecting stronger slowdown in Europe leading to more adjustments in the short run with the adjustments and value coming from rent increase as against cap rate adjustment in the long term. 
Asia was an early indicator of COVID-19 as well as recovering earlier with offices and business parks functioning as normal in China. Asian capital has been going global at an increasing pace. However, with the pandemic, some of the Chinese investors would have strayed away for the short term. Nevertheless, a lot of capital is likely to remain domestic in a short-short term outlook. The quantum of capital being generated both in the public and private market driven by S-REITs is not subsiding.

APAC Investment Trends Accelerated by the Pandemic

COVID-19 has merely accelerated the macro themes in the region highlighting the benefits of diversification where every market is different from the other. Investments that align with macroeconomic themes, the likeliness investments being impacted by COVID is comparatively less than others investments driven by economic factors. The major macro themes that have been highlighted in COVID-19 are:
  • Increased urbanization with more people expected to move to bigger cities with the expected economic hardship in the time to come.
  • Suburbanization with an expected shift in the back-office functions to sub-urbanized regions.
  • Technology upgrade and digitization will become a priority for many and more companies will adopt technology faster for the future and increased tele-commuting.
  • Decentralization in terms of mobility within a city or across the region and increasing need for satellite offices.
  • Localization due to the increasing importance on sourcing the workforce from the local regions.

Investment Philosophy: Pre and Post-COVID

Each geography has a different philosophy when it comes to investment. Most geographies in Europe and Asia are continuing with the strategies placed at the start of the year and have put their pencils down with a few exceptions. There are groups in Hong Kong which have dived headfirst into conducting due diligence and other groups in Asia which are maintaining a no new investment stance for the rest of the year. The US for instance has seen a reversal in investment strategy, with investors widening their European exposure to now turning to look at all the cards on the table and are inclined for any opportunities that will be there.

Portfolio Diversification has become more important in the last months, as more investors are focusing on regions or markets to cover the main cities such as Beijing, Berlin, Mumbai and Shanghai. There is a special focus now being placed on value creation opportunities by creating quality assets instead of buying quality assets to generate returns. There  is also a growing importance to consider ESG and sustainability factors while making investments. Market players expect to see some pricing adjustment which might change the focus to acquiring quality assets and achieve risk adjusted returns.

In a normal market, a core deal would generate core returns and core+ deals would generate core+ returns and similarly, value-added deals would generate value added returns. Prior to COVID there were investors undertaking value added deals and accessing core returns driven mainly by competition. Now, there is a reversal with core+ deals accessing value added returns or core deals accessing core+ returns which paves the way for certain opportunities which are not expected to last though. COVID has highlighted the need for risk-management a lot more than before and risk today is clearly much better priced and rated than before. Before, there was little difference between very risky assets and a less risky asset or between a strong quality asset and less quality asset with a narrow spread. Today the spread is getting wider such as financing is not as available for vacant buildings as it used to be resulting in being remunerated for the risks taken.

It goes without saying that it is essential to understand the genesis of the current crisis in comparison to previous crises which have been more along the lines of an economic crisis. What is being endured currently is a social and a psychological crisis making it difficult to chart out a recovery pattern. Consequently, this results in there being potential for witnessing more asset diversification in residential and logistics with offices remaining a question mark post-COVID.

There is a general notion toward getting discounts, in a 20-bidder scenario you may not have gotten the deal or paid a much higher price as compared to a 5-bidder scenario. There are different means of getting a discount through off-market opportunities that you would not have received earlier or better lease terms. What is being seen today is the increased ability to access certain deals that would not have been achievable in the past due to too much competition. In this volatile environment, there is a lot of interest in safe-harbor investments, alternative to fixed income investments to generate the preferred returns, and yield arbitrage in Europe.

Office Spaces Post-Pandemic

While the current scenario indicates that more people would be working from home post-COVID in comparison to pre-COVID levels, it does not seem likely to the extent that is being alleged. The workforce is currently working well from home because everyone is working from home. Once part of the workforce returns to the office, the working from home success might not render the same results. There is no substitute to the intangible learning from in-person interactions especially in business where sharing real time information and ideas is essential. It is expected that there will be an increase in the use of personal vehicles by the workforce to commute to the office, increasing the need for shower and locker facilities which will ultimately require the developers to relook at their parking standards and installed amenities.

There are multiple large occupiers expressing that increased preference to working from home is a knee-jerk reaction. There are definitely some groups that are going to change the manner of functioning either by taking less space or using their space differently. The reactions contemplated in the office sector remain unknown until the situation subsides. The reactions are flowing on a ‘fear factor’ which once suppressed would flow onto providing different reactions.
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