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Four drivers of real estate returns in Asia Pacific

Optimism for commercial real estate in the region is strong. The $200 billion-plus record investment in 2021 has the potential to grow by 10% this year, despite external risks, with allocations to alternative assets such as multi-family apartments, data centres and medical facilities increasingly appealing, says Andrew Moore, head of real estate, Asia Pacific, Schroders Capital.
Four drivers of real estate returns in Asia Pacific

The investment potential in Asia Pacific’s commercial real estate market is luring institutions in ever-larger numbers – especially towards sectors that are either “alternative” or reflect structural shifts.

Independent data confirms this trend. According to Real Capital Analytics (RCA), for example, investment during 2021 surpassed $200 billion for the first time in a calendar year. The spike in volume year-on-year, by a fifth overall, was led geographically by Singapore and Sydney, which each saw twice the volume of deals as in 2020, and sector-wise by industrial and logistics.

“The Asia Pacific region has some of the world’s most dynamic and fastest-growing real estate markets,” said Andrew Moore, head of real estate in the region for Schroders Capital. “Growth in real GDP, urban populations and the size of the middle class should outstrip other regions over most of this decade.” Even factoring in risks relating to geopolitics and rising interest rates, sentiment is anchored in expectations that investment volumes will continue to rise, possibly by 10%.

Against this backdrop, new opportunities are emerging for asset owners looking for regional real estate to play a diversified and resilient role in their portfolios.

Taking a thematic focus to investing

Perhaps most notable about RCA’s data is the robust nature of real estate across the region during the pandemic. Persistent deal activity, despite the challenges of lockdowns, supports optimism that investors are eyeing Asia Pacific real estate for its longer-term prospects.

In particular, four key trends have led to various market dislocations that investors shouldn’t overlook:

1. Urbanisation
While not a new trend in Asia, the movement of people to the region’s cities is relentless, accelerated more recently by the development of the Greater Bay Area in Southern China, accounting for around 86 million people. This adds to the 235 million people living in the Yangtze River Delta metropolitan area.

Tokyo represents another growth story. While Japan’s population overall is falling, the reverse is true for Tokyo, making it a strong consideration for longer term real estate exposure.

2. Middle-class expansion
In sync with urbanisation, the ongoing accumulation of wealth among individuals across the region is under-pinning the rise of office-based employment. “Offices will be a key driver of real estate demand regardless of the work-from-home trend, whether jobs are based in the office permanently or just part time,” explained Moore.

Activity is expected to be particularly strong in Shenzhen and Shanghai, according to Oxford Economics, which forecasts these two cities to be among the fast-growing globally; combined, they are expected to generate over 1.1 million office jobs over the next five years.

3. Advances in the tech sector
Asia has emerged as a leader in technology beyond electronics manufacturing – including in 5G, mobile communications networks, e-commerce and, increasingly, fields like artificial intelligence.

“This creates technology clusters and hubs around some of the more advanced cities in the tech sector, including Shanghai, Beijing and Shenzhen in China, Bangalore in India, and Singapore,” said Moore. “Tech is also a big source of demand for office space, not just business parks.”

4. Ageing populations
In line with evolving demographics across Asia Pacific, several industry sectors have emerged to cater to the “silver” economy. “We are seeing growth in relation to solutions for retirement living, aged care homes and medical support facilities to that sector,” explained Moore.

In Hong Kong, for example, while nearly a third of the population will be seniors by 2038, there are few viable options for retirees with capital who seek desirable assisted living environments.

Appetite for alternatives

As real estate investors look to deploy their capital, alternative assets within these broader themes are appealing.

“An increasingly common mantra among investors in this space is ‘beds, sheds and meds’,” explained Moore. “With all these assets, there is also a need to adapt and reconfigure existing buildings to new types of use, to further fuel the potential opportunity for investors.”

For example, in certain cities, including Tokyo, but starting to spread to China also, multi-family apartments provide scope for investors to increase their portfolio’s recurring income through the stable rents they deliver. “It is a defensive asset class with rents that are resistant to cyclical downturns,” he added.

Multi-family apartments have become more popular as cities expand and as the population gets wealthier. Further, rising residential housing prices coupled with limited stock are driving more people to the rental market and, as part of this, to co-living arrangements.

Another desirable alternative sector within Asia Pacific real estate is data centres – assuming the right combination of land, power supply and necessary licences and approvals can be found. “Data centres benefit from the structural themes of urbanisation, technology and middle-class growth,” added Moore.

In the medical space, meanwhile, developments in biotech, medical equipment and healthcare are creating new real estate investment opportunities. Life sciences, in particular, require a mix of offices and logistics, such as cold storages or laboratories. “China, India and Japan offer investors a variety of assets in industrial areas or business parks on the outskirts of cities,” said Moore.

Creating a value-add

Regardless of the sector or market, the key with all assets is to identify the right locations and dynamics.

A tried-and-tested approach at Schroders Capital is what Moore described as “entrepreneurial sourcing”, based on the firm’s experience, network and acquisition processes. This lays the foundations to create value that didn’t previously exist.

“We start with our house view on an individual sector and then take a more opportunistic approach to what we see as the growth opportunity to create a value-add angle,” he explained.

Simple examples include acquiring industrial property and changing its use to a data centre; or buying an older hotel building and converting into a complex of multi-family apartments.

From Moore’s perspective, the retail sector offers a lot of untapped potential for adding value. “Neighborhood and grocery-anchored retail outlets have proven robust during the pandemic, certainly compared with luxury and tourist-focused retail.”

This is reflected in one of the firm’s most recent acquisitions – a neighborhood shopping centre in northern Singapore. “This might seem on the surface to be relatively unglamorous and quite defensive,” said Moore. “We see this as an opportunity to relocate some tenants to a smaller space, make more units available to rent, and enhance the management and general environment of the centre.”

Inevitably, a sustainability lens must be applied to the investment process. “We aim to improve the ESG criteria for every asset we invest in,” he explained, “based on the impact on people, planet, place and prosperity.”

This doesn’t prevent the firm from buying an asset that is not a good ESG performer. Instead, the focus is on ensuring the investment will improve the sustainability characteristics during the holding period, to reinforce the value-add inherent in the Schroders Capital philosophy.

Learn more about Schroders Capital's real estate proposition here

About Schroders Capital
Schroders Capital is the private markets investment division of Schroders, the global asset manager. It offers investors a local approach to investing across a diversified range of private asset strategies, supported by a global perspective and the long-established Schroders business.

Investment involves risks. This material is issued by Schroder Investment Management (Hong Kong) Limited and has not been reviewed by the SFC.

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