China, Japan property tipped to see lag in cross-border inflows

Fundraising for real estate investment is showing signs of a potential rebound globally after two fallow years, but two of Asia’s key property markets – China and Japan – could see capital inflows hampered, for different reasons.

That's the view of Louise Kavanagh, chief investment officer and head of Asia Pacific for Nuveen’s real estate division.

The firm has $152 billion of its $1.2 trillion in assets under management invested in property. 

Both mainland China and Japan saw inbound real estate investment rise in the third quarter of 2024, accounting for 27% and 15%, respectively, of the $7.5 bilion of third-quarter cross-border inflows in Asia Pacific, according to JLL.

While well over half of the Japanese inflows were from global sources, almost all of the Chinese inflows came from within Asia Pacific, with Hong Kong and Singapore key sources.

The two countries were the only major markets globally where cost of debt has not eased since the start of the year, said JLL in its Asia Pacific Capital Tracker Q3 2024, published in October.

But there are other reasons why Kavanagh sees China and Japan not seeing as strong a rebound in capital inflows into real estate as they might have done.

Louise Kavanagh
Nuveen

CHINA: DROP IN WESTERN DEMAND

“Very little has been happening in China [real estate] for two years because of price dislocation, geopolitical risk, and lack of liquidity,” she said.   

The country has been suffering a property crisis since 2021, sparked by the collapse of giant developer Evergrande amid huge debts.  

“A good portion of our European investors are saying absolutely no to China, no to Hong Kong, no matter what the return profile is,” Kavanagh said. “For a large proportion of investors there’s no premium that can be attached to investing in China for the time being. This is mainly down to geopolitical concerns.” 

Kavanagh said she didn’t see this situation changing “in the near term”, and her view is echoed by various influential commentators and institutions, such as the IMF. 

On top of geopolitical issues, China’s domestic property crisis remains an issue.

For instance, offices in China “have high vacancies and really high incentive levels, so you're getting hardly anything by way of [rental] yield”, Kavanagh said, “from the scant reading we’re doing”. (Lease incentives are perks offered by commercial landlords to get a potential tenant to take on a contract.)  

“And you’ve still got developers who are either still in the process of failing, or where the government’s trying to step in. So I think there’s still an underlying asset value crisis in some of the traditional key institutional asset sectors.” 

JAPAN: A RATES OUTLIER

Elsewhere, some major markets – notably the US in September – have moved to cut interest rates, in moves that should help boost property investment, but Japan is an outlier on that front. 

However, the broader Japanese property sector is losing some allure thanks to interest rate policies coupled with limited cap rate compression in the near term, Kavanagh told Asianinvestor.  

In July, the Bank of Japan raised its borrowing rates for the first time since 2007 as it moved to control inflation, which has led to a drop in that market’s attractiveness, said Kavanagh.  

The hike means there’s not been cap rate compression – which effectively means rising property prices – so real estate holders have had to rely on income yield, which in Japan is historically low, she said.   

Nonetheless, Nuveen sees senior housing as a very attractive – but still niche – area of real estate in Japan, given its ‘super-aged’ population, with 29% of people now 65 or over.   

Senior living assets are small, at $5 to $20 million US apiece, and there isn’t a lot of volume, said Kavanagh, so creating a portfolio and value requires an amalgamation play by investors.    

Nuveen is making these investments both for its parent, the Teachers Insurance and Annuity Association of America (TIAA), and third-party clients.

AUSTRALIAN ALLURE

The asset manager also sees huge potential in Australia’s purpose-built student accommodation (PBSA) market, given the big shortfall in provision of accommodation.

For instance, only 20% of the students coming in can be housed by universities in Melbourne and Sydney, said Kavanagh, while the rest are having to turn to the private rental market.  

Nuveen is also keen on real estate debt in Australia, where it sees appealing risk-adjusted returns, said Kavanagh. “We see funding gaps in construction; there are lots of developers in Australia that can’t get financing from the banks.” 

The firm is looking at underwriting building in sectors like logistics or PBSA, where it sees long-term growth, she added.