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Three routes to returns in Asian direct real estate

Local knowledge in the region’s diverse real estate markets will enable investors to pivot between defensive and offensive strategies to tap opportunities despite uncertainty, says Andrew Moore, head of real estate, Asia Pacific, Schroders Capital.
Three routes to returns in Asian direct real estate

As investors in Asia Pacific real estate come to terms with the impact of the past 18 months of market turbulence on their portfolio, a nimble and selective approach will help them identify new opportunities as they emerge.

The common belief is that all-pervasive trends such as working from home and the e-commerce revolution will keep demand for office space and retail shops subdued for the foreseeable future. Yet the real estate sector remains vibrant, even in the traditional office and retail segments, and decent returns are achievable as long as investors take a balanced defensive/offensive investment approach.

In fact, JLL reported that Asia Pacific direct real estate transactions reached $34 billion in the first quarter this year, and are on track for $170 billion for the full year. “This would be a marked increase on last year’s $140 billion,” said Andrew Moore, head of real estate, Asia Pacific, Schroders Capital.

More specifically, he expects the bulk of activity over the next six to 12 months to come from several sources:

  • Offices – which represented roughly 50% of the region’s investable universe in Q1
  • Industrial – in particular, logistics and data centres
  • Retail – which has bounced back since 2020
  • Multi-family – which continues to grow in popularity
  • Hotel – which is bouncing back from a low base

Riding on resilience

Inevitably, investors in direct real estate will need to navigate a dynamic macroeconomic landscape in the coming months.

Even if inflationary expectations in the US and Europe are transitory, there is a risk that rates rise quicker than many commentators expect. At the same time, economic recovery across much of Asia Pacific – especially China – has been relatively sharp and seems robust.

Moore doesn’t consider this to be cause for alarm for real estate investors; the relatively low levels of gearing and slight correction in prices during Covid-19 has created some room for rates to increase. Ultimately, he believes confidence will depend on the impact on demand and the drivers of growth once rates start to rise.

Indeed, there is scope for optimism for Asian real estate based on the investment activity in the first few months of 2021.

Notably, the majority of investment activity occurred in markets with strong domestic liquidity bases. JLL’s analysis, for instance, shows that transactions in Japan ($11.5 billion), China ($8.3 billion) and South Korea ($4.3 billion) comprised over 70% of total investment volume in the first quarter, mirroring activity in 2020.

Yet Moore said these mask strong year-on-year rebounds in Australia (by 68%, to $3.2 billion) and in Singapore (by 280%, to $2.5 billion). “This indicates a gradual return of global investors into the Asia Pacific real estate landscape,” he explained.

Identifying the cream of the crop

On capturing the opportunities, Moore said the key is to be able to blend different strategies, benefitting from defensive and offensive assets. “We prefer to have ‘boots on the ground’ to ensure we understand the local markets and can assess the best way to create the most valuable use of each asset, to create returns even in a flat market.”

This might mean, for example, converting an industrial building into office or mixed-use residential to provide value-add.

He added that the question to ask is what the highest and best use of this particular asset would be. “We use partners for our multi-family residential projects, for example, for day-to-day operation. This flexible approach allows us to focus on adding value through conversion and work through market cycles.”

Three key routes to return

As markets emerge from the pandemic, Moore identifies three key themes with the potential to generate favourable returns.

1. Defensive approach
“We have seen significant demand for logistics over the last 12 to 18 months,” said Moore, explaining that while this trend is not new, investors consider this as defensive given a combination of lockdowns and accelerated online shopping.

However, traditional asset classes may also offer defensive investment opportunities, depending on the local supply and demand situation. “Our team, for example, made a defensive investment in late 2020 in the Cityplaza One office complex in Hong Kong, which is a defensive asset in the context of the local market,” Moore said. “The types of tenants here are stickier, with rents roughly one-third of the highest rent in Central and higher occupancy in the Island-East submarket.”

2. Retail assets
A second route to robust returns in the current environment can be in selective parts of the retail space.

Again in Hong Kong, Schroders Capital’s Asia Pacific real estate team saw a promising opportunity in Worfu, a re-branded neighbourhood mall in the North Point district. “This is a grocery-anchored non-discretionary shopping centre supported by local demand, where we did renovations to move tenants and remove risks, rather than having to rely on tourism-driven demand,” explained Moore.

The retail sector broadly reflects more of a growth-oriented strategy in Asia, given it is typically located in core prime positions.

As a result, investors should look for opportunities that are not just a bet on market recovery, but instead where they can see the potential for value-add by refurbishing what already exists, Moore explained.

Worfu entrance before refurbishment (Source: Schroders)

Worfu entrance after refurbishment (Source: Schroders)

3. Residential assets
Residential is a third focus to drive returns within the region’s real estate landscape.

“This is an important asset class and continues to be in demand,” added Moore, referencing recent success that Schroders Capital’s Asia Pacific real estate team has seen in Shanghai.

A good example is the Cohost West Bund project, a multi-family asset within easy commuting distance of the downtown area, where a significant refurbishment created a co-living space including a mix of apartments, retail space and a fitness centre. “This is popular with investors at the moment,” said Moore.

On-the-ground expertise remains key

Regardless of the type of transaction, investors have had to learn to adapt to a new real estate landscape in the wake of the pandemic. In particular, technology and data have both had a big influence amid the requirement to source and execute virtually.

Yet there is no shortcut to proper due diligence and underwriting. “There is no replacement to having real estate teams on the ground in a local market,” said Moore. “This gives investment committees greater comfort to deploy capital.”

“With the breadth and depth of our business in terms of geography and sector, we believe we’re well placed to help investors capture the burgeoning opportunities in this region,” Moore said.

Click here to learn more about Schroders Capital’s real estate proposition and where opportunities are.

About Schroders Capital

Schroders Capital is the private markets investment division of Schroders, the global asset manager. It offers investors a local approach to investing across a diversified range of private asset strategies, supported by a global perspective and the long-established Schroders business.

Part of Schroders Capital is the Real Estate unit which has offices in Hong Kong, Shanghai and Singapore across Asia and has managed real estate funds investing in this region since 2000. By combining our in-depth knowledge of the markets and the dynamic real estate landscape, we aim to deliver outperformance in all economic environments. Schroders has managed real estate funds since 1971 and currently has £16.9 billion (€18.6 / US$21.8 billion)* of gross real estate assets under management as at 31 December 2020. *Real Estate AUM includes holdings of Schroder Real Estate Capital Partners and Schroders Multi-asset Funds.

Investment involves risks. This material is issued by Schroder Investment Management (Hong Kong) Limited and has not been reviewed by the SFC.

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