Are institutional flows to Asia property showing signs of revival?
Institutional investor allocations into Asia’s apartment sector, rose 16% in the quarter ended June 30, to $3.6 billion, up from $3.1 billion on year earlier, according to the latest data published by MSCI Real Assets (formerly Real Capital Analytics) on August 2.
The rate of decline of total investor allocations also fell for the first time since the start of the downturn.
“Broadly we are observing that interest in the living sectors continues to grow across Asia Pacific particularly for emerging markets,” said Ben Chow, head of real asset research, Asia for MSCI.
“China and Australia are the two major markets and both contributed to the year-on-year growth for the apartment sector within the second quarter,” he noted.
Earlier this month, in an interview with AsianInvestor, Chow noted that resilient demand from investors in Singapore and Japan had seen allocations by Asian institutional investors into countries in the region other than their own, increase 3% in the first half of 2023, to $12.2 billion, from $11.7 billion a year earlier.
“Singaporean investors remained active within the quarter across Japan and South Korea, while Japanese investors, who have been one of the more important capital sources globally this year, also struck a couple of notable deals in Australia in Q2,” he said at the time.
GREEN SHOOTS?
The data on apartment flows provide hope for those searching for green shoots in Asia’s property market, which saw a 44% fall in investor allocations in the first half of the year, compared to one year earlier, according to data from MSCI Real Assets.
In some markets, the gulf between buyer and seller expectations, which has held transactions down in recent months, is showing signs of narrowing.
bfinance
Peter Hobbs, managing director of private markets in London at bfinance, many of whose institutional clients are based in Asia, said that he had started to see evidence of completed sales at significant discounts in recent weeks.
“Prices were slow to adjust during Q4 2022 and Q1 2023 due to the shortage of transaction volumes but, by the start of Q3 2023, there was more recognition of the correction in pricing. Investors remain wary of the asset class, particularly due to the ongoing shake out of the office market. But pricing corrections of 10% to 30%, and the increasing prospect of declining rates means that confidence is starting to return to the market,” he said.
Major recent deals include the purchase by a consortium of $3.8 billion Singapore-based real estate manager SC Capital Partners, the Abu Dhabi Investment Authority (ADIA) and Goldman Sachs Asset Management of a 27-hotel portfolio in Japan in July, for $900 million. Since last summer SC Capital has been raising assets for its sixth pan-Asia opportunistic fund, which it plans to close at $1 billion.
Interest rate hikes, which have underpinned the fall in investment activity in property markets around the world, have been more muted in Asia than in the west and commentators have suggested they may be close to the end of their upward cycle.
Hobbs pointed to Australia, where base rates increased 400 basis points between May 2022 and June 2023, but remained unchanged in July 2023.
HEADWINDS REMAIN
But headwinds remain strong, and a return of investor allocations to the highs of last year remain a distant prospect.
“The increase in the cost of debt and its reduced availability have combined with reductions in the relative attractiveness of real estate, due to higher rates being available on other asset classes and the denominator effect [whereby falls in the values of other parts of the portfolio requires sales of property holdings for rebalancing], to push cap rates [which move inversely to prices] higher,” said Hobbs.
Another break was provided on July 28, when the Bank of Japan announced its willingness to buy 10-year Japanese government bonds, in effect widening the trading band on long-term yields. The move, viewed by many as an end to its trading cap, a cornerstone of a long-standing ultra-loose monetary policy, resulted in a jump in government bond yields.
“The upward move for Japan government bonds might put some upward pressure on Japan real estate cap rates,” said Hobbs.
Despite the discounts identified by Hobbs, Chow said the gap between buyers and sellers remained an obstacle to investors completing deals in markets like Australia.
SC Capital
“Particularly for the office sector, where prices have barely adjusted, the gap between buyer and seller expectations remains the widest in Australia of the six major [Asia Pacific] markets.
In July, Suchad Chiaranussati, chairman of SC Capital Partners, told AsianInvestor that almost half of his fund investors were holding back on commitments across private real estate strategies globally, although specialised strategies in asset classes such as logistics and data centres were still popular.
Other experts echo the sentiment: “It may be too early to call a sustained recovery given that interest rates remain elevated and the deal pipeline at the end of the quarter remained subdued,” said MSCI's Chow.