APAC property markets see surge in institutional allocations

Institutional investor flows into Asia-Pacific real estate market surged by 82% in the third quarter of 2024, according to JLL’s Asia Pacific Capital Tracker published on November 4.

This marks the fourth consecutive quarter of growth, bringing year-to-date flows to $96.4 billion, a 28% increase compared to the same period last year.

The surge in investor allocations was concentrated in the region’s largest markets.

Flows into Japan soared by 103% to $8.4 billion, while allocations to Korea rose by 102% to $8.4 billion, marking the country’s highest third-quarter flows since 2019.

Although China’s recovery was more modest, it inflows of $6.2 billion represented a 32% year-over-year increase in the same period.

“Domestic REITs [real estate investment trusts] remained active buyers [in Japan], making large hotel portfolio acquisitions. While base rates are likely to rise marginally in the future, the impact on real estate pricing is expected to be minimal due to strong competition,” the report noted.

“[In Korea] mega office trades re-emerged, while senior loan costs came down, narrowing bid-ask gaps for prime office buildings. Foreign buyers showed conviction in logistics.

“[In China] Local insurers continued to acquire assets offloaded by overseas investors and domestic developers. Corporate occupiers remained an important source of capital. Overseas capital targeted retail assets,” the authors added.

The third-quarter gains across APAC’s three largest real estate markets have driven total year-to-date flows up by 28%, 31% and 3% in Japan, Korean, and China, respectively.

CROSS-BORDER SURGE

Cross-border flows, which had declined in the first and second quarter, rebounded sharply in the third quarter with a 199% increase to $7.5 billion, compared to the same period last year, according to the JLL report.

“Overseas investors mostly targeted office and logistics assets,” the authors stated.

Singaporean investors led much of this cross-border activity, adding $3.25 billion to APAC allocations outside Singapore, with significant investments by GIC in Japan and China.

Hong Kong and Japanese investors were the next largest cross-border allocators, followed by those from the US and then China.

So far this year, $4.3 billion of cross-border flows have come from investors outside APAC. Non-APAC investors favored Japan, which received $2.85 billion (including flows from within Asia).

Australia attracted $3.44 billion, while Singapore received $1.9 billion.

“Australia became more appealing to foreign investors with the view that interest rates have seemingly peaked.

"Overseas investors acquired office and industrial assets in Sydney and Melbourne,” the report authors noted, adding that in South Korea, offshore capital focused on the hotel and industrial sectors.

A year ago, cross-border flows were dominated by Australian and Japanese investors, who accounted for 39% and 40% of flows, respectively.

This year, the distribution in third quarter has become more balanced, with Singapore and China each contributing 21%, Australia and South Korea 15% each, Japan 13% and Hong Kong 6%.

JAPAN APPEAL

Japan continues to be the principal beneficiary of growing investor interest in APAC's real estate sector.

Despite real estate yields are among the lowest in the region, Japan remains attractive to investors with it low interest rates and a banking sector still willing to finance real estate deals, even as other markets in the region become more reluctant.

“The lending intentions of Japanese financial institutions and lenders continue to be robust, offering accommodative access to credit for investors,” the report stated.

In Tokyo, yields in July ranged from 3.8% for multi-family assets to 2.2% for offices, comfortably above the 1.1% yield on 10-year Japanese government bonds - a proxy for real estate financing.

“Japan’s long-term interest rate remains low… Japan’s real estate fundamentals are also in general equilibrium with little-to-no speculative building, adding to its attractive investment thesis,” the report noted.

Prices in Japan’s major sectors are generally higher than they were in 2022, whereas many other APAC countries have experienced price declines during the same period.

In offices, logistics, retail and multi-family, average prices in Tokyo are higher than they were two years ago, according to JLL.

However, the report authors view this price growth as an attraction for investors rather than a deterrent, noting, “The emergence of price growth means investors can view property as an inflation hedge, rather than a substitute for fixed income.”