If Henry Chin, CBRE’s global head of thought leadership for investors as well as Asia Pacific head of research was interviewed by EdgeProp Singapore, his time was drawing near to the close of a seven-week trip through Asia, Australia and the US, Australia and Singapore — his first long-term trip abroad since the outbreak began.
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On his travels, Chin — who is located in Taipei was able to observe an obvious distinction from both the US as well as Asia Pacific (Apac). When visiting offices throughout the US and Asia Pacific, he saw several workspaces that were unoccupied. On the other hand, most employees have returned to their workplaces located in Hong Kong, Sydney and Singapore.
For Chin Chin, it was clear that Apac is in the forefront of the return-to-office trend. “We believe that the need for Apac offices will increase,” he says. The data backs up his predictions that a survey of occupiers of offices conducted by CBRE in May found the Apac office owners were among the most optimistic with 47% anticipating to expand their office space in three years, and only 23% expect to reduce their footprint. Comparatively, both the US as well as Emea (Europe, Middle East and Africa) regions had mixed feelings, with a close 50:50 split among those looking to expand or decrease office space.
The bullish outlook will continue to encourage big-ticket capital deals that are in the Apac office market. US privately-owned firm KKR has completed the acquisition 20 Anson located in Tanjong Pagar for a reported $598 million in April. Then, in June AEW bought Westgate Tower which is a Grade A office property located in the Singapore’s Jurong East, for $680 million. In the same month, Capitaland Investment acquire an office building inside Melbourne’s Melbourne CBD for A$320 million ($317 million). The Singapore listed developer SLB Development acquired a two commercial shophouses on North Canal Road for $14.38 million. It also purchased an office building with 12 floors located at King Street in Melbourne CBD, Australia, for A$35.5 million.
Record year ahead, despite headwinds
Office transactions continue to constitute the biggest portion of the volume of real estate transactions in Apac. In the first quarter of 2022, of the US$31.2 billion ($43.2 billion) in real property transactions, office transactions comprised nearly half of the total of the total at US$14.8 billion. But overall, the investment trend in Apac is booming amid an increase in sentiment. “Investors are flocking to find deals across all types of assets,” Chin observes.
The activity in the region is expected to support up to $150 billion in total real estate transaction volume in 2022, which is a rise of 5% per year and a record total year record if it is achieved as per CBRE. The positive outlook for investment is despite concerns about the rise in interest rates have spread to the US as the ongoing disruptions to supply chains remain a major cause of inflation risk. In the Apac nations, including Singapore, China, Australia and Japan are likely to experience an increase in inflation over the coming year.
This, along with uncertainty such as the pandemic-driven disruptions in China and an effect on the growth outlook. In April the International Monetary Fund cut its growth forecast to Asia in the current year by 0.5 percentage points in the range of 4.9%.
With less growth and higher inflation forecast for the next periods, Chin thinks a recession could be possible in certain areas around the globe. However, he isn’t convinced there’s a recession on the horizon within Apac. Apac region. “In Apac, we’re more likely to see growth that is below the trend however we’re not in the possibility of a recession” He says.
One reason is that major economic powers like China and Japan continue to employ flexible fiscal policies. In January The People’s Bank of China cut the interest rate on one-year loan facility for medium-term loans to boost the economy. A second cut was announced the month of May. This time, it was on the prime rate of five years for loans which is a standard interest rate used for loans. In the meantime, Japan also continues to beat global trends, retaining its extremely low interest rates.
Another good signification is the return of the consumer-driven sectors like F&B as well as retail which is fueled by the sluggish travel demand and spending by tourists. According to a report from the Pacific Asia Travel Association, the number of international visitors to Asia are projected to increase by 100% between 2022 and 2023.
Investors are more prudent
The broad-based improvement throughout Apac continues to entice the investors Chin acknowledges the fact that, in light of current economic uncertainty the market is becoming cautious. A survey conducted by CBRE in April revealed that investors showed an edgier risk-taking attitude in the 1Q2022 period as compared to the preceding quarter and the majority of them citing worries about the increase in interest rates and rising inflation, among other things.
Cap rates are yet another aspect that is being closely watched. A June report from Moody’s Analytics indicated that cap rates across all property segments in the US may see an “moderate rise” in the near-term due to the increase in interest rates. Chin believes that the same thing could be seen in Apac and other countries where central banks are increasing rates of interest, like New Zealand, South Korea and Australia.
He believes that decompression of the cap rate will likely to occur in Apac during the second quarter of the year, but at a lower level when compared to US. “The acceleration of the cap rate compression] here is evident, but it’s much less aggressive than that seen in the US because our rate increases aren’t as extreme,” he explains.
Logistics and offices are still very popular
For sure the office and logistics assets, backed by solid fundamentals, will continue to be popular for investors.
In the case of offices Chin says that, despite the basic factors investors are still enthralled by this sector due to its transparency and liquidity. Another reason could be associated with the current global trend to improve quality. “A large portion of Apac office supplies are brand new, whereas the majority of US office supplies are composed of stock that is older,” he explains. The latest inventory, in addition to providing better-quality spaces for the occupiers, also makes it easy for investors and landlords to renovate existing buildings to meet the increasing need for Grade-A spaces.
Although investors have favored markets with solid fundamentals such as high growth in rental and shortages, such as Singapore as well as South Korea, Chin also recommends investors look into other markets which are primed to recover. This includes cities in mainland China like Beijing and Shanghai and large cities across Australia which have rents that are expected to increase within the next few years.
In the meantime, ongoing supply chain disruptions are predicted to continue driving demand for logistics as well as industrial assets. A survey conducted by CBRE discovered that the majority of% of those who work in logistics are planning to increase their space in the three years ahead with a strong preference for building-to-suit facilities.
Multi-family market that is emerging
The Apac multi-family housing sector, Japan continues to dominate with a robust, liquid and affluent market. In March, real estate developer M&G Real Estate purchased 30 residential properties in Japan from the alternative Asset Manager Blackstone in exchange for JPY49.2 billion ($504 million). Allianz Real Estate, which has set up a $2 billion Japan multifamily residential fund that was backed by Quebec pension administrator Ivanhoe Cambridge last December, purchased 12 multi-family residential properties in Tokyo for $90 million during March.
Investors are beginning to look at different markets, inspired by the growing urbanization and decline in costs for housing in the region. Australia and China are emerging as appealing multi-family locations.
In Australia markets, it is focused on cities with high density like Sydney and Melbourne where investors are partnering with local developers. In April, for instance, M&G Real Estate Asia announced that it would be entering the multi-family industry in Australia with an A$450 million joint venture with local developer Novus.
The multi-family market in China has a strong growth potential due to the rapid growth of its renter population. According to the data in a report published by CBRE in September of last year the total Chinese renter population grew to 220 million in 2020 , and is expected to increase to around 240 million by the end 2022.
Other places, like Hong Kong and Singapore, the need for rental housing has increased the number of hotels bought from investors who are looking to convert these buildings into co-living areas. In in June PGIM Real Estate as well as Weave Living announced a US$200 million joint venture that will explore possibilities within the rental industry in this region. In March a joint venture was formed between Weave Living and SLB Development purchased a row of shophouses which were previously used as Hotel Clover located on Jalan Sultan for $74.8 million.
The problem with data centers
Apac data centers saw a record US$4.8 billion worth of investment in 2021. This is more than the US$2.2 billion that was recorded in 2020. Although the demand for data centers is still high, as evidenced by the increasing demands for broadband capacity Chin states that the market isn’t one that investors are able to penetrate. “The advantage of data centers is that they’re not an investment in real estate that is solely for the purpose of investing,” he says.
Instead, he sees data centres as operating assets that requires specialization. Data centres come with additional complexities including obtaining operating rights and approvals from the government in addition to the security of power and other logistics requirements and keeping service quality. Because of these risks to execution the growing market for data centres including China, South Korea and Indonesia are heavily dominated by local companies. “Only two markets are suitable for investors from outside the country -the two markets of Japan as well as Australia,” says Chin.
Furthermore, a rising amount of investment firms are opting to create their own platforms. Stack Infrastructure, a data-centre company owned by IPI Partners, an investment firm IPI Partners, announced its expansion into Apac in October of last year with the creation of the 36MW pipeline that is located in Tokyo. In the past the Singapore-based SC Capital Partners launched its data-centre technology platform, SC Zeus Data Centres in February. The company has plans for a $500 million superscale building in Seoul.
Opportunities for retail and hotel establishments
The hotel and retail market have been a bumpy road towards recovery, especially since the Omicron variant affected sentiment in the first quarter in the first quarter of. Retail sales came around US$4 billion in 1Q2022, which was up 46% from a year ago. Similar to hotel transactions, hotel transactions witnessed an increase of 47% increase in y-o-y in the amount of US$2.5 billion.
With increasing numbers of Apac countries beginning to relax travel restrictions, hotels and retail properties are set to profit from the sluggish demand for travel which will be released when the borders are fully opened.
Chin is especially optimistic about the core retail assets of major cities, noting that the weaker fundamentals are driving an increase in quality and flight to quality, as in the office space.
“Retailers recognize that they are able to request lower rent in higher-quality buildings located in the CBD which is where the majority of consumers can be found,” he explains. To achieve this prime, well-located retail malls located in markets like Singapore, Sydney, Melbourne, Hong Kong, Seoul, Tokyo and Osaka are likely to reap the benefits when border restrictions are eased and travel returns. Chin predicts that other retail destinations will be also benefiting, particularly in tourist hot spots like Tokyo as well as Osaka.
In the midst of China’s mainland China along with Hong Kong’s travel boundaries not yet reopened, Singapore has been a major beneficiary in terms of employment, travel and investment opportunities. “I believe that once Hong Kong reopens, people who reside in Singapore temporarily might be able to move back into Hong Kong,” says Chin. “While the current mood is towards moving to Singapore the housing market is at levels that haven’t been seen in a long time and rental rates are increasing to 30% to 50%. We’re keeping an eye to find out exactly what Singapore government will do as it is known to take action on things such as rent and price increases.”
