Investors to target top-quality Asia property in second half
The impact of the Covid-19 pandemic has left a deep impact and means Asia-based property investors will likely focus on the highest quality commercial real estate in the region, according to a new report by CBRE released on Tuesday (June 16).
The property services firm noted that the pandemic and resulting lockdown has caused a thus-far short but deep recession, which will likely take time for countries to recover from, not least given the prospect of further waves of virus infections.
That “will require investors to adopt very different strategies to the ones they were considering just a few months ago”.
CBRE ran a flash survey on the initial Covid-19 response of real estate investors. The top response was to delay investment decision-making in general over the past few months; this was followed by having to discuss potential rental payment delays or reductions, as tenants have struggled to keep pace amid a recession.
However, investors indicated in the survey that their priorities are likely to shift in the second half. In particular that are likely to focus more on quality assets and core investments, as they seek out stable cash flows.
“Properties generating secure income in gateway cities will be prioritised over assets and locations further out on the risk spectrum,” the report noted.
In addition, property funds and investors are likely to prioritise rigorous due diligence on assets, although rent renegotiations – and thus a reduction in income streams – are also likely to continue.
Apart from top-quality commercial buildings, CBRE advised that investors also target core and core plus logistics investments, noting that it is “now an established institutional asset class, thanks to long leases”.
Examples of the rising interest in logistics abound, with Asia Pacific asset owners having allocated $1.1 billion to regional logistics as of May 18, according to Real Capital Analytics.
TOP OF MIND
The danger of the virus over the longer term is certainly on the mind of institutional investors across the globe, both in real estate and other asset classes.
Consultancy McKinsey did a survey of the thoughts of asset owners across the globe which it published on Monday (June 15). One area of particular concern? Commercial real estate.
As the survey summary noted, that “illiquid asset classes, whose valuations typically lag behind in public markets, have been a source of concern – in particular, property portfolios.
“As one leader told us, “I’m worried about our commercial real-estate portfolio, especially offices, given work from home …. what is the ‘next normal’ going to look like?”
That was a concern of CBRE’s report too. It said that “the pandemic has also raised questions about the future of office demand, particularly around the potential for more permanent shift to large-scale remote working and the possibility of increased space occupancy ratios”.
That said, it noted that grade-A office properties have thus far withstood the economic conditions, “particularly in terms of pricing”.
While market conditions remain uncertain, asset owners are very alive to the prospects of potential bargains to be had in these markets, including in the property sector.
“The best investments that I have made in my lifetime have generally come down to two words: ‘forced sellers,’” the head of portfolio construction at a leading North American pension fund told McKinsey in its survey.