Commercial real estate transactions in Asia Pacific are closing in on pre-Covid levels, with experts from Manulife, CBRE and Schroders eyeing assets in Singapore and the Greater Bay Area, even as Covid risks linger.
According to a CBRE report, office leasing demand in Asia Pacific has picked up in the first half this year, with net absorption rising 20% year-on-year, driven by strong performance in North Asia. As a result, CBRE has revised its full-year leasing demand forecast from 5% year-on-year to 10% to 15%.
“Office rental rates have been recovering. For example, you probably see headline news about companies moving away from expensive offices to middle or lower-cost accommodation, but at the same time you have seen people upgrading themselves, from low to medium-cost accommodation to higher-cost locations,” Kenny Lam, senior managing director, head of Asia real estate investments at Manulife, told AsianInvestor.
GREATER BAY APPEAL
Manulife is particularly attracted to the Greater Bay Area, which comprises Hong Kong, Macau and nine major cities in the Guangdong province.
“Mainland China is definitely one of the largest markets in the region. It's a market that you know most institutional investors would want to have exposure to. In terms of what people are looking at, I think people are focusing on top-tier cities in China. A new theme is the Greater Bay Area which has attracted much attention from the market, including a focus on data centres, logistics and rental housing,” Lam from Manulife explained.
He added that liquidity in Hong Kong has also been satisfactory, being one of the most active markets in the region. In addition, while investors are still cautious about the retail and hotel subsectors in the city, they have been more optimistic about office and industrial buildings.
In April, Manulife signed a Grade A office lease agreement in Hong Kong that was the city’s largest since July 2019. The deal involved a 145,000 square foot office space across four floors at the International Trade Tower (ITT) in Kowloon East. Local media reported that Manulife had rented the space for HK$4.06 million ($521,664) a month.
Allan Lee, head of Asia (ex-China) at Schroders Capital Real Estate Asia Pacific, also noted that investors favour the Hong Kong market for its higher liquidity.
“Compared to other regions, Hong Kong is a market with higher liquidity and more active transactions. Investors tend to be more diversified, favouring the more efficient tax and legal environment. You can find individuals or local families or developers involved in buying and selling transactions in the city, along with pensions and insurance firms,” Lee told AsianInvestor.
Apart from Hong Kong, Singapore has also been one of the top choices among investors.
“Singapore lacks office supply in the short term and prices are very tight. But people are thinking about the organic demand for Singapore: both Asian and Western technology companies are coming to set up branches in Singapore, driving a lot of demand in the market. We are running a few deals at this point of time and I can tell you the pricing competition is so strong,” said Henry Chin, head of research Asia Pacific at CBRE.
However, the experts noted that in some major Asia markets, the impact of the Delta variant of the virus that causes Covid-19 is still lingering, which is a risk that investors should keep a close eye on.
“We have yet to return to the pace we were at before the pandemic, but transactions are picking up because people are getting used to operating in the pandemic environment,” Lee from Schroders said.
CBRE has spotted opportunities in gateway cities such as Tokyo, Seoul, Shanghai, Hong Kong, Singapore and Sydney, and Chin cautioned that even though each market is in a different cycle, investors must look beyond immediate performance, Chin told AsianInvestor.
“For example, Shanghai’s office rental market is currently weak-ish due to excess supply coming onstream soon, but as a future hub, it’s still attractive to long-term core investors. We look at asset quality and level of competition relative to other asset classes when identifying opportunities,” he added.
In addition, while diversification remains key, investment strategies must differ across markets, the experts agreed.
“For example, Japan provides a very good yield in terms of real estate, because if you're buying real estate at 3%-4% yield, but your cost of debt is basically at less than 1%. But the growth would be very flat compared to the rest of the region. For example, Australia provides both good yield and some capital appreciation, so that's why a lot of investors spend a lot of time to gain exposure in Australia,” Manulife’s Lam said.
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