Institutional investors gravitate to logistics real estate in Asia

Residential, logistics and data centres are expected to see sustained interest, while office, hospitality and retail sectors could see a recovery in the next 2-3 years.
Institutional investors gravitate to logistics real estate in Asia

Asia Pacific institutional investments into real estate surged in the second quarter of 2021 after a quiet 2020, a recent report by real estate group CBRE has found.

“Thematically, industrial and logistics is one sector that investors have gravitated to, and we expect this trend to continue. The sector accounted for 23% of total turnover in H1 2021, much higher than the 12% in 2019,” Greg Hyland, head of capital markets at CBRE Asia Pacific told AsianInvestor.

“Australia, Mainland China, Japan and Korea remain a key focus for industrial buyers while at the same time there is growing appetite for logistics assets in Southeast Asia and India,” he said.

During the quarter, investment volume in Asia Pacific bounced back to pre-pandemic levels, growing 99% year-on-year to reach $41 billion, according to the CBRE’s Asia Pacific MarketView Q2 2021 report released on Thursday (Aug 5).

Institutional buyers had the largest resurgence, leading in transaction volume of over $10 billion, compared with other buyer types such as real estate funds, real estate investment trusts (Reits), and private investors (see chart on right below).

Source: CBRE Asia Pacific MarketView Q2 2021 report

In terms of territories, mainland China had the highest transaction volume at $15 billion, reflecting a 117% year-on-year increase (see chart on left above).

“Several major portfolio and big ticket transactions by insurance and sovereign wealth funds contributed to the large increase in transaction volume,” Hyland said. “These included Ping An’s acquisition of partial stakes in the Raffles City developments in mainland China, the acquisition of SK Tower in Beijing by a local insurance company and GIC’s acquisition of a logistics portfolio in Australia together with ESR.”

Other markets with relatively high growth included India (354%), Hong Kong (270%) and Australia (196%), the report found.

Local investors made up the bulk of transaction volume in Australia and Hong Kong. Retail assets were popular among Australian Reits, while demand for counter-cyclical retail opportunities in particular rose in Hong Kong.

While logistics will continue to drive interest among institutional investors, Hyland said residential and data centres will also likely continue to see strong performance.

In addition, Hyland is expecting to see recovery in the office, hospitality and retail sectors as economies emerge from the pandemic.

Already, there are signs of recovery in the office sector. Regional Grade A office net absorption increased 11.7% compared to the same quarter last year, indicating higher occupancies. However, rents contracted 0.6%.

“Looking further ahead, there is an emerging hospitality play over the next 24 to 36 months and capital is already looking at ways to get into the sector,” he said. “We’re also seeing some real value emerge in the retail sector, which has been relatively unloved over the past five years but now offers attractive entry points to re-imagine retail.”

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Hyland believes that investors will continue to allocate capital to real estate despite the emergence of Covid-19 variants.

“Any uncertainty that impacts re-opening is a concern and a risk for investors. But at the same time it is important to bear in mind that real estate decisions are typically very long dated,” he said.

Investors should however look out for some near-term challenges including oversupply concerns in mainland China, and high prices across the region.

“Investors will have to be more astute in searching for returns [in mainland China],” he said. “Trends in industrial and data centres that we see in other markets are also playing out in China, offering some opportunities for investors.”

Deal flows at acceptable pricing will also be a challenge, as a combination of yield compression and rental growth have driven up prices across Asia Pacific.

“Looking ahead, as the cap rate compression cycle slows, returns will be more reliant on income growth and investors should keep a close eye on interest rates,” he said. “Underlying all of this of course is the shape and pace of the pandemic recovery as a resurgence may yet delay rental growth recovery.”

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