Investors eye Japan, Singapore real estate amid rising cost of debt
Real estate investment in Asia Pacific cooled during the first half of this year amid the rising cost of debt, macroeconomic turbulence caused by the Russia-Ukraine conflict and a protracted lockdown in the region’s major market, China.
Asia Pacific real estate investments declined 17% year-on-year to $70.9 billion during the first half of 2022 (1H 22), an August 4 report by JLL found. The fall comes off a high base as volumes reached record highs in 2021 driven by a rebound after markets adjusted to the pandemic.
Country-wise, Singapore and Hong Kong were outliers, with 1H 22 real estate transaction volumes gaining 81% to $9.3 billion, and 18% to $5 billion, respectively, year on year. Singapore was propped up by big ticket office and mixed-use transactions including Income@Raffles, while Hong Kong was boosted by a number of en-bloc industrial sales, the report said.
The Asia Pacific office sector attracted the most flows, at $30.6 billion during the first half, though activity was down 8% from last year, according to JLL. Industrial and logistics sector investments plummeted 37% to 14.6 billion, while the retail sector took a 31% hit at $14 billion.
Alternative assets such as data centres saw deployments drop 12% to $1.4 billion.
“Tailwinds supporting the commercial real estate asset class remain intact with dry powder at near record levels at the end of the second quarter. There is no lack of equity or debt market liquidity, but lenders have become more selective, while bid ask spreads widened. Deployment remains a focus with portfolio diversification critical across asset classes,” Pamela Ambler, head of investor intelligence and strategy, Asia Pacific, JLL told AsianInvestor.
Investors are looking to deploy dry powder to the tune of $57 billion as of end June, the highest ever recorded. Dry powder in the real estate sector stood at $52 billion through 2021 and $53 billion in 2020.
FLIGHT TO QUALITY
Investors are set to make a beeline for the more mature markets, including Singapore, Japan and South Korea as they navigate headwinds in the form of monetary tightening and the threat of overshooting, which poses a downside risk to growth.
They are also contending with the rapid rise in inflation amid the double whammy of sanctions on Russia coinciding with the supply chain breakdown in Ukraine, and dollar strength, which have combined to make commodities more expensive. That said, greenback strength has opened up forex arbitrage opportunities for buyers, with Japan set to benefit.
At $11.5 billion on June 30, real estate deal activity in Japan was two-thirds of the amount clocked in 1H 2021. The lack of logistics-related trades was especially conspicuous during the first half, JLL said.
“Foreign capital is particularly keen on opportunities in Japan as the yen hovers around two decade-lows against the dollar,” said JLL’s Ambler.
Japan retains positive carry across all real estate sectors, CBRE’s Greg Hyland, head of capital markets, Asia Pacific told AsianInvestor. That, together with low local interest rates and cheap currency, will fuel capital inflows.
Their views were echoed by Andrew Haskins, head of strategy and investor advisory, real estate, Asia Pacific, Schroders Capital: “Prime grade Japanese property assets look attractive relative to the world’s lowest interest rates and bond yields, while the broad range of opportunities available in Tokyo (Asia Pacific’s largest urban commercial property market) and other big cities should continue to attract investors.”
Ambler said the share of sale and lease back deals in Japan is projected to shrink, further supporting investment activity.
Market observers were bullish on Singapore as well, citing support both through thematic fundamentals such as the push for sustainability and renovation to create green buildings, and corporate relocation out of regional competitor Hong Kong, where onerous pandemic containment measures have sparked a strategic rethink among companies.
Although rentals in the Lion City are trending upwards, this will not weigh on demand because investors will keep following occupiers’ lead, Haskins said. At the same time, cap rate compression and rising interest rates will check the pace of increase in transaction volumes.
The trio were also positive about the outlook in South Korea, which recorded the highest transaction volume in Asia Pacific at $15.3 billion, unchanged from the year before. Foreign capital will complement strong domestic demand in South Korea.
Factors including a limited supply pipeline and swelling inflation are putting a floor under rents. Investors in Korea will be less bullish on cap rates and pricing given the uptick in financing costs, Ambler pointed out.
Look out for part two of this story, which will focus on the sectoral winners in Asia and the outlook for Chinese real estate.