Three core – and three contrarian – Asia Pacific real estate investment strategies for 2022

Last year was a strong one for investment in Asia Pacific commercial real estate, largely driven by pent-up demand from 2020, when many investors suspended purchasing following the onset of Covid 19. This has set up 2022 to be another banner year for the region, with investment volume expected to reach a record high.

CBRE’s recently launched 2022 Asia Pacific Real Estate Market Outlook forecasts the investment volume to exceed pre-pandemic levels, with investors still having ample capital for deployment.

Among the opportunities, we explore some core – and also contrarian – investment strategies for the year ahead.

Real estate records

CBRE expects total investment volume in 2022 to increase by between 5% and 10% year-on-year, hitting a record high of $150 billion.

Asia Pacific-focused closed-ended real estate funds are expected to be active this year amid the continued strong fundraising environment, which has seen them raise $83 billion of equity since 2018. Meanwhile, REITs and institutional investors – including sovereign wealth funds, insurance companies and pension funds – remain cash rich, possessing around $17 billion and $500 billion of equity¹, respectively, on their balance sheets for future investment.

Asia Pacific regional investment volume

Logistics assets will remain in high demand, while interest in offices is expected to strengthen this
year, supported by the return to the office and improving real estate fundamentals.

Demand for retail and hotel assets will take longer to recover following the emergence of the Omicron variant and the reintroduction of tighter border controls and social distancing regulations in many markets. However, in the past year we observed several investors acquiring assets in these two sectors by forming joint ventures with operators to take advantage of price dislocation. This is a trend that we believe will continue in 2022.

With Asia Pacific commercial real estate capital values set to hold firm this year, fuelled by competition for quality assets and improved space market dynamics, we have identified three core and three contrarian investment strategies for investors to consider.

Core investment strategies

The first core investment strategy is to focus on greenfield and brownfield logistics opportunities in emerging locations.

CBRE’s 2021 Asia Pacific Logistics Occupier Survey found that 78% of logistics occupiers intend to expand their logistics space over the next three years. Their preference will be for tailor-made solutions by leasing build-to-suit facilities, partnering with investors to develop brand new properties, or acquiring land to develop their own assets.

Upgrading older but well-located logistics facilities is another avenue for investors to tap into strong leasing demand for good quality warehouse space near major transportation hubs. While current vacancy rates are low – standing below 3% in 14 out of the 16 Asia Pacific cities tracked by CBRE – investors should carefully select sub-markets with a limited supply pipeline for redevelopment opportunities, such as southern Seoul, Shanghai’s Jiading and Minhang areas, Tokyo, Sydney, Melbourne and Brisbane.

The second core strategy is to selectively choose turning office markets. Thanks to ample flight-to-quality demand, well-located high quality office properties have withstood market weakness throughout the pandemic. In our view, the impact of the introduction of hybrid working on office demand in Asia Pacific markets has also been limited.

Investors should consider value-added opportunities such as upgrading well-located lower grade office buildings to meet future tenant demand.

Investors with longer holding periods could also focus on markets that are reaching a turning point, such as Beijing, Shanghai and major cities in Australia. With these markets likely to start recording mild rental growth in the second half of 2022, there will be attractive opportunities for investors with a five-year holding period.

Considering emerging multi-family markets in Asia Pacific is another core investment strategy. While Japan remains the primary destination for multi-family investment, mainland China is increasingly being viewed as a growth opportunity, and Australia’s build-to-rent market is attracting attention from international insurance companies and pension funds that are looking to partner with local developers. However, investors should be aware of various regulatory hurdles while investing in mainland China and Australia. 

Meanwhile, we continue to see increasing interest in Hong Kong from investors looking to purchase hotels for conversion into co-living space in urban areas.

Contrarian investment strategies

There are also a number of contrarian strategies that we believe investors should consider in 2022.

The first is not to overlook the hotel sector. While the slow resumption of international travel has delayed the hotel market recovery, pent-up travel demand for both business and leisure will be unleashed when borders reopen. Many investors are already anticipating this trend, with 2021 witnessing an uptick in investment activity in the hospitality sector in markets such as Japan and Australia.

The second contrarian strategy is to revisit core retail. While pandemic-related social restrictions and border controls continue to weigh heavily on the retail sector, flight-to-quality is also appearing in the retail sector.

Many retailers remain willing to open new stores or secure quality space in core locations, highlighting the investment appeal of prime shopping malls. Some investors with retail management expertise may view the current downward trend as an opportunity to buy well-located retail facilities.

In our view, prime shopping malls in Japan, mainland China, Singapore and Australia, as well as high street retail in Hong Kong could present opportunities to investors. Australia is particularly interesting with many centres offering expansion potential to introduce mixed use offering including multi-family, offices and last-mile fulfilment centres.

Finally, exploring secondary retail in prime districts could be another opportunity for investors this year, especially in Tokyo, Seoul and Hong Kong. With secondary retail taking longer to recover amid subdued leasing demand, there will be opportunities for investors to negotiate more attractive pricing by taking on vacancy risk.

Bright outlook

Overall, we believe the outlook is bright for the Asia Pacific real estate market in 2022, with strong investment liquidity in both equity and debt set to fuel the investment market, and ample growth opportunities and strategies for investors to consider.

In our view, those real estate investors that use the year ahead to take proactive steps to navigate ongoing uncertainty while capitalising on these opportunities will be well-positioned for long-term success.

For an in-depth analysis into what the year ahead holds for the region’s real estate market, read CBRE’s 2022 Asia Pacific Real Estate Market Outlook here.

Source
1 - These figures are based on cash and cash equivalents reported in the financial report of the listed REITs and insurance companies in Asia Pacific and other third-party information vendors