EMERGING TRENDS IN REAL ESTATE - ASIA PACIFIC 2019 - PWC
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Emerging Trends in Real Estate ® Asia Pacific 2019
Emerging Trends in Real Estate® Asia Pacific 2019 A publication from:
Contents
1 Executive Summary
3 Notice to Readers
4 Chapter 1: Calling the Top?
7 China: Key Themes
7 Big Money Chases Slow Growth
9 Will Cap Rates Reverse?
10 Strategies Evolve
11 Japan: Key Themes
11 Value-Add Ticks the Boxes
13 Build-to-Core Strategy Aims at Institutions
14 Return of Distress?
14 Emerging Markets Still a Draw
15 Niche Sectors Still in Demand
17 Worker Housing Cuts Commutes
17 Government Policies Boost Affordable Housing
18 Co-living – Template for the Future?
18 Multifamily – Slow but Steady
19 Australia: Key Themes
21 Coworking Questions Remain
22 Rate Hikes Loom
23 Chapter 2: Real Estate Capital Flows
25 Japan’s Great Wave
25 China’s Tide Retreats
26 Singapore and Hong Kong Take Up the Slack
27 South Koreans Turn to Europe and Debt
27 U.S. Investors Up the Pace of Asian Investment
28 Fundraising
30 Banks Becoming More Cautious
31 New Lenders Still Emerging
33 Debt Opportunities in China
33 Stress and Distress
34 Bonds Lag as Beijing Tightens Liquidity
35 REITs
38 Chapter 3: Markets and Sectors to Watch
41 Top Investment Cities
51 Property Types in Perspective
56 Interviewees
Emerging Trends in Real Estate® Asia Pacific 2019 i
Editorial Leadership Team
Emerging Trends in Real Estate® PwC Advisors and Researchers
Asia Pacific 2019 Chairs
K.K. So, PwC Australia Indonesia
John Fitzgerald, Urban Land Institute Andrew Cloke Brian Arnold
Bianca Buckman David Wake
Principal Authors Iain Boot Margie Margaret
Alex Frew McMillan, Urban Land Institute Consultant James Dunning
Japan
Mark Cooper, Urban Land Institute Consultant James McKenzie
Akemi Kitou
Jane Reilly
Eishin Funahashi
Contributing Editor Joseph Carrozzi
Hideo Ohta
Colin Galloway, Urban Land Institute Josh Cardwell
Hiroshi Takagi
Kirsten Arblaster
Koichiro Hirayama
Contributing Researchers Kristen Stubbins
Raymond Kahn
Michael Owen, Urban Land Institute Morgan Hart
Soichiro Seriguchi
Scott Hadfield
Pauline Oh, Urban Land Institute Takashi Yabutani
Shannon Davis
Yusnita Baharuddin, Urban Land Institute Takehisa Hidai
Sue Horlin
Tanya Lee, Urban Land Institute Takeshi Nagashima
Tony Massaro
Luxembourg
ULI Editorial and Production Staff China
Carolin Forster
James A. Mulligan, Senior Editor Gang Chen
Kees Hage
David James Rose, Managing Editor/Manuscript Editor Hong Kong Robert Castelein
May Chow, Senior Vice President, Marketing & K.K. So
Philippines
Communications, Asia Pacific Paul Walters
Malou Lim
India
Singapore
Anish Sanghvi
Chee Keong Yeow
Bhairav Dalal
Magdelene Chua
Dhiren Thakkar
Maan Huey Lim
Tanya Tandon
Emerging Trends in Real Estate® is a trademark of PwC and is registered
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Recommended bibliographic listing:
PwC and the Urban Land Institute: Emerging Trends in Real Estate® Asia
Pacific 2019. Washington, D.C.: PwC and the Urban Land Institute, 2018.
ISBN: 978-0-87420-420-9
ii Emerging Trends in Real Estate® Asia Pacific 2019Executive Summary
After nine years of relentless expansion, Asia’s real estate markets are facing rising
headwinds. An impending trade war, rising interest rates, tighter access to credit, and
buyer fatigue at sky-high prices for both commercial and residential properties are
causing investors to question whether the long bull cycle may be reaching its peak: “The
market’s wobbling like a jelly on a plate,” as one investor put it. “We’re at historic highs
across the board.”
That said, market fundamentals in 2018 remain robust. Transactions for the year are at
record levels and pricing is strong, sustained by ever-growing volumes of institutional
capital piling up in Asia’s biggest economies.
For now, then, the music continues, and although some investors are looking to sell down
their holdings and reposition, the sheer weight of capital looking to find a home in real
estate means that prices may not fall significantly even if other indicators turn south.
As a result, and as in previous years, investors must consider more varied strategies than
in the past to get money into the market.
Survey Responses by Country/Territory
25
24.7%
20
17.9%
Percentage of responses
17.0%
15
14.0%
10
9.5%
5 5.9% 6.0%
5.2%
0
Singapore Australia Hong Kong India Japan Philippines China Others*
Source: Emerging Trends in Real Estate Asia Pacific 2019 survey.
*Includes Germany, Indonesia, Malaysia, South Korea, Taiwan, Thailand, United Arab Emirates, United
Kingdom, United States, and Vietnam.
1 Emerging Trends in Real Estate® Asia Pacific 2019In the current environment, developed
Survey Responses by Geographic Scope of Firm
markets have the broadest appeal.
Australia, therefore, remains the most
popular choice, in part because the
fundamentals remain sound—relatively Other focus
high yields and good prospects for rental 2%
increases. In addition, the country’s deep
and liquid markets offer a port in a storm.
Japan has many of the same features.
Pan-Asia focus 25% 46% Focused primarily on
one country/territory
But with competition for assets in gateway
cities meaning they are now out of reach
of increasing numbers of investors, there is
more readiness to look further afield.
26%
Global focus
That means, for a start, that emerging
markets such as Vietnam and India
continue to attract attention. And riskier Source: Emerging Trends in Real Estate Asia Pacific 2019 survey.
strategies are again go-to bets, with
value-add and “develop-to-core” both
popular approaches. The latter normally
requires greater attention to the land plot,
construction quality, and partner than although prices may not fall much given perfect Petri dishes to explore how co-
simply location. Higher-yielding plays such the huge amounts of liquidity currently in living works in an Asian context, although
as logistics and data centres also fit the bill. circulation. A correction would also mean tenants in co-living complexes are not
more expensive debt as well as restricted always focused on cost-saving.
This greater taste for risk is reflected in the access to debt, together with a flight-to-
higher returns that investors are targeting safety mentality that would tend to support In terms of capital flows, meanwhile, the
this year. More than half (53 per cent) of mature markets, as noted above. Finally, ongoing buildup of liquidity across Asia
those surveyed are targeting annualised there would be a likely reversal of capital continues to see huge amounts of money
gains of 10 per cent and above by the flows in emerging markets. being sent cross-border to be invested
end of 2019. Last year, only two in five in foreign real estate assets, despite a
investors (41 per cent) had the same high Otherwise, several modern-day concepts tightening of the regulatory crackdown in
returns in mind. are gaining traction. Over the last few China that has resulted in steep declines
years, coworking and shared workspaces in outgoing flows in 2018. Other capital, in
At the same time, some investors are have taken off in Asia, lending a tech edge particular from Singapore and the United
considering how markets would look in to the stodgy serviced-office sector and States, has stepped up in its place. Strong
the event of a downturn. Most obviously, promising better returns for landlords. outgoing flows in Asia seem certain to
this implies more distress, which has Doubts remain about the viability of current continue given in particular huge new
been thin on the ground in recent years. operating models, however. reserves of capital from Japan that are
Already, some distress opportunities expected to join the mix in 2019.
have appeared in markets including India, Co-living, on the other hand, has obvious
China, Indonesia, and even Japan. In appeal in Asia’s ultra-high-cost residential Bank debt remains readily available for
addition, transaction volumes would drop, environment. Asia’s gateway cities are real estate investors in most markets,
Emerging Trends in Real Estate® Asia Pacific 2019 2although impending interest rate hikes and sovereign bonds. Singapore REITs slightly the fore. All these cities offer relatively high
tightening lending terms are expected to underperformed other large regional REIT returns relative to local interest rates and
restrict access going forward. As a result, centres. Amongst emerging markets, sovereign bonds. Singapore continues to
more debt funds are being formed, in India finally looks set to kick-start its benefit after its rebound from last year’s
particular looking at opportunities in China domestic REIT industry with the launch lows, while Shanghai and Shenzhen
and Australia. Mezzanine debt returns of a large portfolio of business properties also put in respectable performances
more than bank finance and is also seen early in 2019, more than four years since considering especially government moves
as safer than buying actual real estate—an regulators introduced domestic REIT to restrict availability of debt capital to
important safety net if markets correct. legislation. developers.
REIT markets have turned in a fairly Finally, this year’s investment prospect
stagnant performance in 2018—an rankings reflect the enduring appeal of
unsurprising consequence of the upward the slow-but-steady returns offered by
trajectory in global interest rates as gateway cities in developed markets, with
capital transitions to higher-yielding Melbourne, Sydney, Tokyo, and Osaka to
Notice to Readers
Emerging Trends in Real Estate® Asia Pacific is a trends and forecast publication now in its 13th edition, and is one of the most
highly regarded and widely read forecast reports in the real estate industry. Emerging Trends in Real Estate® Asia Pacific 2019,
undertaken jointly by PwC and the Urban Land Institute, provides an outlook on real estate investment and development trends,
real estate finance and capital markets, property sectors, metropolitan areas, and other real estate issues throughout the Asia
Pacific region.
Emerging Trends in Real Estate® Asia Pacific 2019 reflects the views of individuals who completed surveys or were interviewed
as a part of the research process for this report. The views expressed herein, including all comments appearing in quotes, are
obtained exclusively from these surveys and interviews and do not express the opinions of either PwC or ULI. Interviewees
and survey participants represent a wide range of industry experts, including investors, fund managers, developers, property
companies, lenders, brokers, advisers, and consultants. ULI and PwC researchers personally interviewed 89 individuals and survey
responses were received from 373 individuals, whose company affiliations are broken down below.
Private property owner or developer 24%
Real estate service firm (e.g., consulting, financial, legal, or property advisory) 24%
Fund/investment manager 22%
Homebuilder or residential developer 10%
Institutional equity investor 6%
Bank lender or securitised lender 3%
Other entities 11%
Throughout the publication, the views of interviewees and/or survey respondents have been presented as direct quotations from the
participant without attribution to any particular participant. A list of the interview participants in this year’s study who chose to be identified
appears at the end of this report, but it should be noted that all interviewees are given the option to remain anonymous regarding their
participation. In several cases, quotes contained herein were obtained from interviewees who are not listed. Readers are cautioned not to
attempt to attribute any quote to a specific individual or company.
To all who helped, the Urban Land Institute and PwC extend sincere thanks for sharing valuable time and expertise. Without the
involvement of these many individuals, this report would not have been possible.
3 Emerging Trends in Real Estate® Asia Pacific 2019Chapter 1: Calling the Top?
“Both in terms of rent and capital values around the region, we’re near the
top of the cycle.”
Barring an errant 18-month spell through peaked, and if so, how they should react.
the end of 2016, cross-border transaction To be certain, the same question has been
volumes in Asia have known only one nagging investors in Asia for years—but
direction since the financial crisis: up. this time, alarm bells are ringing louder than
Central banks ensured money was easy, if ever.
not quite free, and property markets joined
equity markets in climbing to new highs. Despite a few pockets of weakness, real
estate fundamentals in Asia have yet to
Over the last year, though, real estate show significant signs of decline. In fact,
investors in Asia have begun to think again. buoyed by a number of big-ticket deals,
Across the region, upwardly spiralling commercial transaction volumes reached
prices, compressed cap rates, and an all-time high on a rolling 12-month
ominous macro and geopolitical indicators basis in the first half of 2018, according to
have fund managers and asset owners analysts Real Capital Analytics (RCA).
wondering whether the markets have finally
Exhibit 1-1 Asia Pacific Investment by Source of Capital
Domestic Cross-border within APAC Cross-border from outside APAC % Cross-border
200 40%
180 35%
160
30%
Volume (US$ billion)
140
120 25%
100 20%
80 15%
60
10%
40
20 5%
0 0%
'12 '13 '14 '15 '16 '17 '18
20%
10%
Year-over-year change
0%
–10%
–20%
'13 '14 '15 '16 '17 '18
Source: Real Capital Analytics.
Emerging Trends in Real Estate® Asia Pacific 2019 4Chapter 1: Calling the Top?
In Hong Kong, huge sums paid in a Perhaps unsurprisingly, those markets also dominate our survey findings of the most
couple of flagship deals involving Mainland attractive markets for regional investment and development (see chapter 3). Cap rates,
Chinese investors propelled the city to the meanwhile, have continued to compress, especially in Australia and South Korea.
top of the charts (second worldwide only to
the New York City metro area), despite its But while neither transaction statistics nor the profitability forecast in our 2019 survey
reputation as a market where stock rarely (see page 10) betray particular signs of weakness, interviewees across Asia voiced a
trades. consistently negative theme that markets were at or near a cyclical peak, with some
investors who don’t have to stay invested indicating they were looking to sell properties
Otherwise, spending by domestic into the current strength.
institutions saw both Tokyo and Seoul also
registering high volumes, with deal flow In Hong Kong, one opportunistic investor commented that “The market’s wobbling like
in the latter up 66 per cent over the same a jelly on a plate at the moment. Nothing is making us collapse or melt, but nothing is
period in 2017. Sydney, Shanghai, and making us rise, but it’s hard to see where the markets are going to go from here—we’re
Melbourne were the other Asian markets at historic highs across the board.”
among the global top 30, rounding out
a shopping list of gateway cities for core
investors in search of Asian assets.
Exhibit 1-2 Property Cycle—Percentage of Respondents
Perceiving Market Conditions to Be in Various Stages of the Cycle
Peak Upturn Bottom Downturn
Tokyo 95 5
Auckland 61 17 4 19
Sydney 58 13 29
Melbourne 56 6 37
Hong Kong 46 16 6 32
Singapore 38 38 6 19
Brisbane 33 11 55
Bangalore 13 63 13 13
Beijing 13 50 38
Mumbai 6 57 25 13
Guangzhou 63 38
Perth 55 45
Shanghai 36 64
Kuala Lumpur 17 23 60
Jakarta 13 25 63
0 10 20 30 40 50 60 70 80 90 100
Source: RICS.
5 Emerging Trends in Real Estate® Asia Pacific 2019In Sydney, a residential developer said: opposed to being part of a syndicate for In many ways, the lack of a cataclysmic
“With U.S. 10-year bond [yields] rising, one of the megabanks, to me that means event marking an end to the current long
you’d have to say we’re at the top of the you’re nearing the top, and something has bull market would probably be seen as
cycle, so cap rates are only going to go to give.” healthy, indicating a return to a normal
one way—out—in most people’s opinion. cyclical dynamic with consequences more
Someone said to me the other day that if As a result, investors are looking over their predictable (and probably less severe) than
you look at the real estate cycle as a clock, shoulders for some event that might spark those of a black swan. In any event, more
the prime commercial market seems to be a downward move. In previous years, the than a few investors seemed to welcome
stuck at 11:30.” consensus was for a “black swan”—some the return of the bear, where deals would
unknown unknown—to be the catalyst, proliferate and probably pay more than
And in Japan—a perennial favourite for as happened in 2008. This time, though, they do currently. As one fund manager put
core investors—one foreign fund manager some mundane event seems a more likely it: “I wake up every morning saying, ‘Please
observed: “I do think Japan is definitely cause—rising interest rates, falling bond let there be stress,’ which is a nice way of
coming in for a correction. When yields or stock prices, fallout from trade wars, saying we need to get some distress back
are down so much that you start to see or simply investor fatigue at waiting for a in the market.”
very small regional banks coming to Tokyo turning point to arrive.
to try to finance real estate directly as
Exhibit 1-3 Sales Volumes for Most Active Global Real Estate Markets, First Half of 2018
2017 H1 2018
Rank Rank Market Sales Volume (US$ million) Year-over-year Change
1 1 NYC Metro $26,034 23%
7 2 Hong Kong $19,681 89%
3 3 London Metro $17,476 7%
2 4 LA Metro $15,867 4%
5 5 SF Metro $11,188 -7%
6 6 DC Metro $10,663 24%
9 7 Tokyo $9,276 11%
4 8 Paris $8,479 19%
13 9 Chicago $8,182 42%
8 10 Dallas $8,012 -12%
21 11 Seoul $7,785 66%
12 12 Atlanta $6,233 -8%
26 13 Phoenix $5,984 59%
24 14 Seattle $5,722 27%
11 15 Amsterdam/Randstad $5,662 -6%
19 16 Miami/South Florida $5,208 -21%
18 17 Houston $4,915 -9%
14 18 Boston Metro $4,621 -45%
20 19 Sydney $4,346 -2%
25 20 Denver $4,226 9%
28 21 Toronto $3,944 32%
31 22 Munich $3,775 18%
17 23 Rhine-Ruhr $3,706 -37%
10 24 Shanghai $3,687 -48%
22 25 Frankfurt/Rhine-Main $3,499 -32%
30 26 Philly Metro $3,227 17%
15 27 Berlin-Brandenburg $2,920 -51%
34 28 Austin $2,891 -27%
32 29 Melbourne $2,852 50%
35 30 San Diego $2,769 21%
Note: Includes office, industrial, retail, apartment, hotel, senior housing, and elderly care real estate.
Source: Real Capital Analytics.
Emerging Trends in Real Estate® Asia Pacific 2019 6Chapter 1: Calling the Top?
China: Key Themes forcing many developers onto the sidelines. or located in a less fashionable area used
“Government pricing is now just too high,” as spillover for back-office purposes.
With GDP growth in China ticking down to one investor said. “The basis doesn’t Then international expertise provides
its lowest rate since the global financial work.” Starved of capital, developers now global property standards and financial
crisis and senior officials making also have less money to replenish land management, while the local partner
uncompromising statements about the banks. contains labour and operating costs.
need to curbing further home price rises,
Mainland markets end 2018 in subdued Increasingly, therefore, land at auction The flood of institutional capital that has
mood and a sense that change is in the air. often goes unsold, previously a key source built up in China at least provides an exit
“In China right now, the macro view is that of revenue for many local governments. for investors willing to take development
the way most private-equity investors have That is causing some authorities to resort risk. “Build to core” is the play. “In all
made money in the past is not how they’re to drastic action. “There are signs that of our markets, there’s a shortage of
going to make money in the future,” one government auctions are now coercing quality yielding institutional assets for local
special-situations investor said. companies to make bids, because institutional investor as well as foreign
companies are not wanting to do that,” investors,” the investor said. That provides
As usual, government policy mandates have the family office head said. the exit for development or value-add
been enforced by imposing limitations on projects. As a result, “we are looking to
credit for both developers and retail buyers. Opportunistic Entry create institutional-quality assets to sell
As a result, according to the head of a into that market.”
family office that invests exclusively in China: Opportunistic investors may look for other
“We are seeing residential prices softening ways of purchasing land. One special- Returns in the low teens are attainable for
significantly.” The impact of the measures situations investor is targeting stabilised opportunistic plays in China, particularly
is being felt in other parts of the industry returns of 13 per cent in China. “We are for value-add projects with a hands-on
too. Whether residential, commercial, or very focused on developing something approach and a strong local partner.
industrial, “the clampdown on government that is better than the tenant is expecting The choice of product and partner is the
credit to real estate companies is at a lower cost than they expected,” the key determinant of profit margins, rather
happening.” investor said. That is achieved by working than the choice of market. “I don’t see a
with local partners to drive secondary- massive differential these days between
Adding to these problems, land in major market plot prices as low as possible, Shanghai, Beijing, Shenzhen, Guangzhou,
cities has become prohibitively expensive, perhaps because the seller is distressed,
Big Money Chases Slow Growth are pushing that figure well north of 10 For European or North American
per cent. “There are trillions of dollars institutions such as pension funds and
Fears of an impending cyclical reversal lined up wanting to get invested in real insurance companies, Asian assets offer
come as liquidity in the market reaches estate, massive amounts of capital,” one better returns than they can earn at home.
an all-time high, with capital from some of opportunistic investor said. So “there’s a In particular, if they are comparing the
the world’s largest institutional investors— lot of money pushing the market up, but excess return from prevailing rental rates
mostly based in Asia—continuing to pour not great expectations of [rental] growth.” over the local cost of borrowing, markets in
into regional property assets as investors
Japan and Australia are attractive options.
seek to boost income beyond what With so much capital now in play, the
regional or global bond markets can offer. search for core investments in Asia is Institutional buyers enjoy a number of
Having resisted real estate investment in tougher than at any point since the global competitive advantages over private-
the past as an illiquid and alternative asset financial crisis. According to one core equity players. In particular, investment
class, they now increasingly view it as a investor: “Obviously, the pricing is where it yields are not necessarily seen as the main
mainstream portion of their portfolios. is—it has made our lives more difficult, and consideration, allowing the big funds to
requires a lot of work to get one investment look to other factors, including long-term
As a result, allocations to property that in done vis-à-vis what it was five years ago. capital appreciation, diversification of
the past were considered aggressive at 5 But as an insurance company, we are a assets, and provision of a safe haven in the
per cent to 8 per cent of assets are now de longer-term investor with certain unique event of a global economic downturn.
rigueur, with some investment managers features and the ability to hold things long-
reporting that the biggest institutions term.”
7 Emerging Trends in Real Estate® Asia Pacific 2019Chongqing, Wuhan—they’re all monstrous a different perception of risk,” the investor Big developers are therefore sometimes
multimillion-square-foot markets,” one pan- said, “so you’ve got to be very aggressive spinning off smaller parts of their business
Asia opportunistic investor said. “There’s and very quick to get in as a foreigner to that have experience as niche operators,
a lot of business in all of them, and I don’t buy.” providing opportunity for overseas
think you’d really worry too much about investors to provide capital and operational
being in one place or the other.” Beijing’s drive to reform China’s bloated expertise. Through restructuring, “you’ve
state-owned enterprises (SOEs) may got groups that are not natural owners of
Competition is fierce, though, particularly indirectly provide support to real estate these assets looking to sell,” the special-
as the clampdown on overseas property investors. Pushed to become more situations investor noted. “In the past, big
purchases “means there’s more money in efficient, SOEs are offloading noncore developers weren’t interested because it
China trying to get itself invested. And often portions of their businesses, which may no was too small an opportunity.”
they’re less-sophisticated investors with longer fit with the parent’s core operations.
Exhibit 1-4 Office Sector: Projected Total Annual Return, 2018–2022 In addition, because pension funds and
insurers can operate with little or no
leverage, rising interest rates are less of a
10-year bond yield Excess return risk, nor are they subject to the limited life
spans of private-equity funds, allowing them
Shanghai – Pudong 4.1% 3.1%
to “play it through cycles,” as an investor at
Osaka 0.1% 7% a large insurance company put it.
Sydney – CBD 2.8% 4.2%
Asian institutions investing in their domestic
Fukuoka 0.1% 6.5%
markets enjoy further advantages. They
Shanghai – Puxi 4.1% 2.5% are, of course, more familiar with local
conditions. In addition, they are exempt from
Nagoya 0.1% 6.3%
a range of factors such as currency-hedging
Beijing – overall 4.1% 2.1% costs, foreign-exchange restrictions, fees
Melbourne – CBD 2.9% 3.3% and charges aimed at overseas entities,
as well as the expense of moving money
Auckland – CBD 3.1% 2.9% internationally. As a result, “it’s very difficult
Seoul – CBD 2.7% 2.7% to compete with local capital for core
assets,” the investor said. “Almost by
Yokohama 0.1% 5.3%
definition, if you’re layering in the cost of tax
Singapore – Marina Bay 2.6% 2.7% and currency hedging, your cost of capital
2.6% is going to be higher than the domestic
Singapore – Shenton Way 2.6%
competition for the same assets.”
Kuala Lumpur 4.5% 0.7%
Guangzhou 4.1% 0.9%
Singapore – Raffles Place 2.7% 2.2%
Brisbane – CBD 2.8% 1.7%
Adelaide – CBD 2.8% 1.5%
Tokyo 0.1% 4.2%
Perth – CBD 2.9% 0.7%
Hong Kong – overall -0.4% 2.5%
Hong Kong – Central -0.6% 2.5%
–1 0 1 2 3 4 5 6 7
Note: Projected compound annual return. Excess return equals rate of total income plus capital
appreciation over the local 10-year sovereign bond rate.
Source: DWS, as of July 2018.
Emerging Trends in Real Estate® Asia Pacific 2019 8Chapter 1: Calling the Top?
Will Cap Rates Reverse? Exhibit 1-5 Most Problematic Issues for Real Estate Investors
The glut of institutionally held core capital
circulating in regional gateways is now
forcing more yield-sensitive investors to Low yields 6.10
travel ever further afield in search of deals.
This means not only that assets are harder Lack of investable properties 5.81
than ever to find, but also that cap rates
continue to be prohibitively tight. Possible trade wars 5.50
Competition from Asian buyers 5.40
The one difference this year, however,
is that—with the possible exception of
Impending interest rate hikes 5.33
Australia—there is a growing consensus
that yield compression may finally have Currency volatility 5.16
reached its limit. As one investor said:
“We still have more money chasing assets Competition from global buyers 5.03
than assets available, which is why cap
rates—which in my view should have Global economic growth 4.91
been moving out some time ago—are still
stubbornly low. But I wouldn’t say they’re Cost of finance 4.89
compressing anymore. They probably were
Asian economic growth 4.82
six months ago, but I think now—though
I say this every year—cap rates have 1 2 3 4 5 6 7 8 9
bottomed out.” Least Neutral Most
problematic problematic
This is not to say, however, that cap-rate
Source: Emerging Trends in Real Estate Asia Pacific 2019 survey.
compression is about to reverse anytime
soon. Rising interest rates in the United
States are starting to filter through to the
Asia Pacific region, which means logically whether buyers will keep buying at these
that cap rates there should begin to move levels. And I think they will, because a lot
out too—partly because investors’ cost of these private-equity funds have to—you
of capital is higher and partly because don’t get paid for keeping cash in the
alternative investment types (such as bank.”
bonds) thereby become more appealing.
One factor that may make a difference
Still, as the investor pointed out: “You have around the margins is slowing activity by
to wonder whether the capital markets’ Chinese investors, as regulatory restrictions
supply-and-demand equation will permit on capital moving out of China tighten
cap rates to rise, because if you want further. In some locations (in particular “We still have more money
to buy a building, you have to make the Australia and Hong Kong), this has caused chasing assets than assets
owner an offer he can’t refuse that is something of a vacuum because Chinese available, which is why cap
always better than the next man’s, and buyers have been generally more willing rates—which in my view should
there are plenty of next men in the markets. to push the envelope in terms of pricing, have been moving out some
My bet is that any change is going to be especially at the top end of the market. time ago—are still stubbornly
pretty slow. You might see a different Japanese insurers and pension funds low. But I wouldn’t say they’re
reaction in the residential sector because are now beginning to step into that void, compressing anymore. They
it’s sentiment driven, but the commercial but they are still early and small in their probably were six months ago,
markets will be very much dependent on allocations. but I think now—though I say
this every year—cap rates have
bottomed out.”
9 Emerging Trends in Real Estate® Asia Pacific 2019Strategies Evolve Exhibit 1-6 Investors’ Targeted Returns between End of 2017 and
Ongoing competition among investors to End of 2018
place capital is in turn continuing to shape
Over 20% 0%–5%
how investors approach the sourcing of
assets. As a result, buyers today are more 9% 6%
likely to be very site-specific, working from
the ground up rather than the top down.
One European institutional investor said 15%–20% 17%
that his company still starts with a macro 34% 5%–10%
viewpoint and an analysis of “megatrends”
such as the emergence of Asia’s middle
class and the rapid digitisation of the
region. Increasingly, however, it is having
to drill down to specific cities, and then 10%–15% 34%
subsectors of cities to find deals—the
individual asset, based on issues such
as land-acquisition prices, construction
quality, and market segmentation—that Investors’ Targeted Returns between Now and End of 2019
makes much more difference than the top-
Over 20% 0%–5%
down view: “There’s a lot more figuring out
of investments as opposed to in the past 9% 7%
where we used a broad brush, and said
‘Let’s invest in office in Tokyo, done.’ ”
15%–20% 21%
If core prices are now too high for many 31% 5%–10%
investors to buy, what are the alternatives?
For some—and probably increasingly
so—the answer is nothing at all. Many
funds are now sitting on growing reserves
of unused capital, hoping for a reversal in 10%–15% 32%
the market to offer up buying opportunities.
For those with a more opportunistic
mandate, however, or who are duty-bound
Source: Emerging Trends in Real Estate Asia Pacific 2019 survey.
to deploy capital, the obvious option is to
migrate to riskier strategies and markets.
More investors now have little choice but
to go down this road in order to deploy
Exhibit 1-7 Real Estate Firm Profitability Trends
capital. As a result, and although yield
compression inevitably means that buyers
today must assume more risk for a given
return, our survey still suggests a skew
Excellent
higher in return expectations. Some 21 per
cent of investors now target returns of 15
to 20 per cent in the 2019 survey, up from
17 per cent in 2018 (see exhibit 1-6).
Good
Fair
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Source: Emerging Trends in Real Estate surveys.
Emerging Trends in Real Estate® Asia Pacific 2019 10Chapter 1: Calling the Top?
Japan: Key Themes to any market that a foreign investor can despite a revival in Japanese wage growth
breach. providing a slight lift to rents, investor
Perhaps surprisingly, Japanese cities have
interest in residential has waned as the
migrated upward in this year’s investment One unique aspect of the Japanese market supply of suitable properties dries up.
prospect rankings to near the top of the is that returns can be outsized due to
table, following a couple of years when the low cost of borrowing (i.e., sub–1 per According to one investor active in the
investors questioned whether local markets cent), access to relatively high amounts of sector: “I think part of it is that lenders are
had run out of steam. Their resurgence is leverage, and the availability of seven- to concerned about pricing. They’re saying,
likely a reflection of the fact that Tokyo in 10-year fixed-rate financing, which basically ‘Do we want to do something below a 3
particular is one of the few destinations in locks in a minimum level of return from the cap?’ I’ve always thought the 3 per cent
the Asia Pacific region where institutional outset. In the Asia Pacific region, only Hong level was going to be a hurdle in Tokyo.
investors can find a deep and liquid pool of Kong promises lower annual total returns People were suggesting it could go to a 2,
assets to trade. on office property than Tokyo, according to but once it does, when you start to look at
DWS. But with the risk-free (i.e., Japanese that price per square metre on the building,
Tokyo promises stabilised, high-quality government bond) rate at only 0.1 per cent, it’s higher than you’re selling individual
office assets that have delivered better- Tokyo’s annual 3 per cent cap rate offers condos for—obviously that doesn’t support
than-expected returns in the last couple a handsome yield spread over both cost of your strategy for making money.”
of years. “We expected flat-ish rents over capital and the local sovereign. That said,
2017 and ’18, but have been surprised by investors are reporting that borrowing rates As a result, some investors are now
3 per cent to 7 per cent [increases],” the may be set to inch up, and in practical rotating into B-grade office. According
Asia CEO of one European developer said. terms may indeed already have done so to one fund manager: “If you’re looking
Yields have generally fallen around one given new bank policies imposing upfront at B-grade and below-market rents, I
percentage point over the last five years, fees on lending. think that’s still a good play. Probably still
due to strong capital value growth. Still,
defensive for all intents and purposes, but
many of the best buildings in the Japanese Last year saw investor focus turn away I’m more comfortable with tenants who
capital are closely held by Japanese from office and towards to the residential pay 20,000 yen or less per tsubo because
corporations, or trade between the market, which offered slightly higher yields I can raise their rents a bit and still make
developer and its sponsored REIT. Even together with lower volatility. Yields have it work for me, and I can also find tenants
the buildings that change hands often do now compressed drastically, however, and to take that space even in a downturn. In
so behind closed doors, without coming
Value-Add Ticks the Boxes
Although there are many ways for investors to assume more risk, the most popular So many have inherent inefficiencies—
today is perhaps the ongoing shift toward value-add noted in last year’s report, focusing from physical shortcomings, tenant mix,
especially on providing more flexibility, better user experience, and improvements through or business use issues—that might be
better design and technology—whatever it takes to drive income growth from the addressed.
property. Long-term structural shifts in the
economy and in demographics are
A large, shiny office space may have shophouses nearby that would attract tech changing the ways that work, living,
entrepreneurs, given the right overhaul. Old police stations can become retail and arts and retail spaces are being used,
venues. Shopping centres down on their luck can regain a relevant position by adding creating new opportunities to reposition
courier-pickup operations, coworking space, and gyms. assets.
There is a multitude of buildings in
On one level, this strategy is an obvious response to the lack of core product, as well as
Asian cities now past their prime.
unprecedentedly high prices. At the same time, squeezing extra efficiency from buildings
Asset enhancement therefore fits well
in Asia is an obvious play given that:
with an overarching theme of urban
regeneration that continues to gain
momentum across the region.
11 Emerging Trends in Real Estate® Asia Pacific 2019Tokyo, that stuff is trading high-3s/low-4s have to be cautious; it has to be driven brokerage, although Middle Eastern
basically.” by location and quality. But the difference sovereign funds have been buyers. “The
compared to 10 years ago is liquidity. city centres of those four or five cities will
Those focused on higher yields continue Those markets have developed their own be fine, but the regions around them are
to look to secondary cities, though even characteristics. All of them have their own facing terminal and irrevocable decline.”
here yields are being squeezed. According economic base, so the liquidity will remain,
to one locally based fund manager: which was the biggest issue before. When Play those numbers right, though, and
“Osaka basically has become overheated, there was a correction they suffered from operationally the investment works. “The
particularly for residential, which is below a liquidity issues, but I don’t think that’s yield is there, the coupon is there, you’re
4-cap now. We’re not players at that level, going to be the case again.” hitting return targets—probably better on
but for office you’re seeing cap rates at many other investments throughout the
4.5-ish, which is one of the reasons it still Regional retail, meanwhile, is another story. world,” the broker said. But your capital
makes sense—Osaka office is probably a Developers may still build speculative office may be stuck, surely with your shopping
good story still because rents are relatively space in big cities, but the same does not centres finding few buyers of the assets.
low.” apply to retail. Big-box operators have The math then works only if your rental
a formidable understanding of regional yields and renewals have covered your
Prices in Nagoya and Fukuoka, meanwhile, demographics, and target only sweet- initial investment. “Do you want to be the
“have gone up and don’t make sense to spot locations. That can work—for the one left standing when the music stops?
us,” the fund manager added. “So my view brave. “Regional retail is a pretty polarising The exit is blurry.”
for the non-Tokyo markets is that you just strategy,” said the Asia CEO of a regional
Still, it is important not to see value-add
Exhibit 1-8 Broad Sectors in Which Investors Are Now Active or
as a panacea. Investors must pick and Plan to Be Active in 2019
choose the right asset, and an intimate
knowledge of local markets is often needed
to understand whether it can succeed.
Homebuilding for sale
In Tokyo, for example, some foreign
44%
investors have made headway converting
86% Office
grade-C buildings to grade B, or updating
lower-grade office buildings to meet current Hotels 55%
requirements for earthquake resistance or
fireproofing. This is not a straightforward
exercise, though. “If you are just showing 65% Retail
up to do it, [you should] pack up and Multifamily/ 58%
go home, it’s not going to happen,” one rented residential
Tokyo-based consultant said. “If you find 62%
one building to do that in a year, wonderful. Industrial/distribution
There are groups that have been there
since the mid-1990s and have always had Source: Emerging Trends in Real Estate Asia Pacific 2019 survey.
a presence and are looking to do the same
thing. Has that strategy been played out 10
years ago? Absolutely.”
become so expensive that it is often easier said. “I can’t conceive of a situation where
The difference between first-class space to start over than attempt to upgrade to putting a fresh coat of paint and lipstick
and properties built in the wake of Japan’s current standards. “It’s grade C because on a building isn’t better than knocking it
property bubble is now too stark for the it’s super-old, or the floor plate is too small, down and rebuilding it.”
tactic to work. Disaster proofing has or the location is subpar,” the consultant
Emerging Trends in Real Estate® Asia Pacific 2019 12Chapter 1: Calling the Top?
Build-to-Core Strategy Aims at for the risk, but then you are left with the hitting a level of market maturity that is
Institutions core portfolio at the end,” the investor equivalent to that in cities such as London
explained. “At the end of the day, what and New York City. With effectively no
Development is another strategy now we’re chasing is income-producing land in city centres left to sell, and with
increasingly on investors’ radars, especially assets.” surrounding areas already developed for
with so many institutional investors in miles around, the natural response is for
the market. The overall dearth of core The Indian market is another destination planners and developers to focus instead
properties in Asian markets, combined ripe for development projects: “The market on opportunities to buy dilapidated,
with an apparently limitless hunger for is becoming institutional very quickly,” underperforming, or outdated city-centre
core product, means that build-to-core commented one opportunistic investor, assets and either reposition or redevelop
strategies have become a go-to option and “development of office is where you them.
even for risk-averse investors who would want to be, selling into that. The demand
normally regard development risk as a for office investments over there is very, For China, this marks the first time that
bridge too far. very strong, and prices have gone up the outlet for ever-growing price pressures
significantly over the last two or three in downtown areas is to redevelop for
As a result, build-to-core projects, years.” urban regeneration purposes rather than
particularly office space in underserved head for the expansive suburbs and make
markets such as India or even Seoul, have The objective is to produce assets of the new space. This promises to open a new
become common. “If we want a scalable right quality to outperform what’s already paradigm of city-centre development
presence in India, is the stock going to be in the market. “The market is oversupplied opportunities for foreign funds that
there for the next five, 10, 15 years?” one pretty much across all sectors across is not contingent on buying land in
core investor asked. “If the answer is no, China,” another special-situations investor competition with big domestic developers
you may want to start developing those.” said. “But in the right markets in the right at government auctions. “We are working
cities in the right assets, the product is not with partners to develop real estate that’s
Call them accidental, even reluctant there.” Development will therefore fill that not being met by current supply and is now
developers. The temporary goosing gap. in demand,” the special-situations investor
to returns from delivering a successful explained, referring to one such project.
property is highly desirable, though the Interestingly, the same investor feels “The sophistication of the end users has
ultimate goal is to own a largely risk-free that China’s biggest cities are now advanced beyond the property that’s
building for decades. “You get rewarded available.”
Exhibit 1-9 India Volume by Property Type
Income-producing assets Dev sites Cross-border share %
8 70.0%
7 60.0%
6
50.0%
(Volume US$ billion)
5
40.0%
4
30.0%
3
20.0%
2
1 10.0%
0 0.0%
'11 '12 '13 '14 '15 '16 '17 '18
Source: Real Capital Analytics.
13 Emerging Trends in Real Estate® Asia Pacific 2019Return of Distress? In Australia, Chinese developers have
been unable to complete some deals
Finally, and given especially the perception
after regulators tightened controls on
of an approaching turn in the cycle,
capital exports from China. This is not
investors are once again eying the potential
exactly a distress scenario, although
for distress plays in Asian markets. With
it does involve a forced divestment.
the possible exception of China, such
According to one local developer:
opportunities have been thin on the
“The deals I’m seeing so far probably
ground for several years, and although
wouldn’t involve losing money—pricing
fund managers are by now well aware that
is good and it’s just a financing issue.
distress in an Asian context is not as easy
But ultimately, if the market continues
to exploit as it is in the West, the potential
to slide even moderately, there might
for higher returns is one that will be hard
be a pricing adjustment as well.”
to pass up for fund managers sitting on
sometimes large stockpiles of dry powder
(see chapter 2, “Stress and Distress” for
more).
Emerging Markets Still a Draw
More adventurous investors have long
Interestingly, the topic of distress was eyed Asia’s emerging markets as a “I think logistics was going
a recurrent theme during this year’s potential source of higher returns. Though to be big in all those markets
interviews: not for the faint of heart, emerging-market
anyway because they’re all
investment is increasing as economies
underserviced—if you pick one
In Japan, one locally based investor grow and the base of investable
sector, they’re always going
recounted how smaller regional banks assets grows with them. According to
for this one. I can’t talk enough
had been approaching fund managers one consultant: “It’s all ASEAN at the
in Tokyo asking them to bid on the moment—they’re all interested in the
about logistics with people, it’s
banks’ nonperforming loan (NPL) Philippines, Indonesia, Malaysia, Thailand. the ‘in’ subject.”
portfolios—the first significant indication And Vietnam is hot, hot, hot.”
of distress in Japan in several years.
Another reason for the uptick of interest
In Indonesia, foreign consulting firms
is that developing economies may benefit
were reported to be advising local
from the budding trade war between the
banks on selling off their real estate
United States and China. According to one
NPLs.
Manila-based developer: “The Philippines
In India, domestic banks recently shut is a largely domestic market that doesn’t
down provision of debt capital to mid- export a lot, so trade issues don’t usually
market residential developers as they affect us. But we could soon see more
reassessed their portfolios following Chinese companies shifting operations
default by a large nonbank financial here to avoid U.S. tariffs.” Interviewees
institution. According to one locally operating in several emerging-market
based interviewee: “In the last few countries reported that this process was
years, residential sales haven’t picked already underway, with demand in local
up, so the developers have survived industrial and business parks surging as
by refinancing—paying off bank A by Chinese companies take up space. In this
borrowing from bank B or a nonbank way, the trade war has proved a catalyst
financial institution. That game of for a process already underway. As one
musical chairs has temporarily come to consultant put it: “I think logistics was
a standstill.” As a result, many mid- going to be big in all those markets anyway
tier developers are being now forced because they’re all underserviced—if you
to consolidate or put their land banks pick one sector, they’re always going for
on the market in order to meet debt this one. I can’t talk enough about logistics
obligations. with people, it’s the ‘in’ subject.”
Emerging Trends in Real Estate® Asia Pacific 2019 14Chapter 1: Calling the Top?
VIETNAM continues to be a major focus
Exhibit 1-10 Reasons for Investing in Niche Sectors
for emerging-economy investors, with Ho
Chi Minh City ranked as the highest such
market (at number seven) in our investment
Less competition
prospect poll. Vietnamese gross domestic
from other investors
product (GDP) growth of 6.8 per cent
is the highest in the region, with strong 13%
activity from both Chinese and Japanese Demographic
manufacturers. 28% demand drivers
Stable income
return 15%
Housing has historically been the focus
for foreign investors in Vietnam, usually
in partnership with a local developer.
In addition, a number of deals have Higher yields
Diversification 21% 23%
occurred over the last year, with foreign
investors buying into the platforms of local
developers. Market segmentation has now
shifted from the high to the middle part
of the spectrum, as urbanisation leads Source: Emerging Trends in Real Estate Asia Pacific 2019 survey.
to ongoing demand for housing in large
urban centres. Ho Chi Minh City alone
has projected demand for new housing investors are in NPLs (investors must be This year, logistics infrastructure in
amounting to some 400,000 units per year. wary of scams) and also in picking up bulk emerging markets has also become
Worker-focused housing has widespread purchases of residential units directly from a focus, given a near-complete lack
appeal, therefore. One interviewee pursuing developers with a view towards potentially of modern stock and fast-growing
an opportunistic strategy was focused converting them to serviced apartments. manufacturer sectors. Demand is booming
specifically on the 55 per cent to 65 in Vietnam, Indonesia, and especially India,
per cent income percentile, translating Niche Sectors Still in Demand where the mid-2017 introduction of a
to homes that in Ho Chi Minh City cost nationwide goods and services tax (GST)
Meanwhile, higher-yielding alternative asset
around US$80,000. Quite simply, “that’s has revolutionised how goods are delivered
classes also continue to gain traction:
what they can afford,” he said. across the country. With the government
now also according infrastructure status
LOGISTICS continues to be a go-
In the past, logistics facilities in Vietnam to warehousing projects, “there is a huge
to theme, given preexisting structural
did not factor as a priority for investors, pipeline of demand for large build-to-suits
shortages and vast new demand driven by
despite a booming manufacturing sector because there is hardly any ready-built
e-commerce retailing. This is perhaps the
and generally poor existing infrastructure. demand,” according to one local investor.
only sector where investor opinions were
That is changing now, though, boosted “So, the name of the game today is to
uniformly bullish, and unsurprisingly the
by regulatory changes that allow foreign buy land and construct, or if you can pick
sector once again tops our sector survey
enterprises to operate more freely in the up a brownfield site that already has the
rankings. Developer willingness to build
sector. approvals, then take it up and construct.
new facilities without precommitments from
It is one of those rare sectors where the
tenants is testament to the strength
INDONESIA has been on the radar of demand side is completely outstripping
of the market.
emerging-market investors for years, with supply. With an approved piece of land, for
Jakarta nominated as our survey’s number- every good parcel there are least two or
Investment allocations to the sector have
two investment prospect destination as three tenants waiting.” As another investor
risen significantly in 2018, with action
recently as 2015. Its stock has fallen more commented: “Find me a more compelling
centred on major cities in China, as well
recently, however, as a result of an ongoing asset class than logistics in northern
as Australia and Seoul. One fast-growing
glut of office and residential supply. While India—I’d take that gamble all year long.”
trend is the emergence of last-mile
the market overall remains soft, there is
delivery hubs, again as a means of tapping
currently significant foreign investor interest DATA CENTRES were previously shunned
e-commerce growth. This implies demand
in the logistics sector, according to one by real estate investors as too specialist,
for inner-city distribution centres, with
locally based consultant, due to a massive but have since emerged as another
investors looking in particular at underused
undersupply of modern facilities. Even in-favour niche. Debate continues as to
and lower-grade office, retail, and industrial
here, however, activity remains muted given where they fit in an investment portfolio (as
spaces near city centres. It also boosts
the high prices demanded for industrial infrastructure, tech, or real estate?), but
demand for new technology, in particular
land in established industrial parks. Other the returns on offer have today gradually
automated storage and retrieval systems
potential areas of interest for private-equity eroded these concerns.
that can improve delivery speeds.
15 Emerging Trends in Real Estate® Asia Pacific 2019The “big four” markets for data centres
Exhibit 1-11 Prospects for Niche Property Types in 2019
so far are Singapore, Tokyo, Hong Kong,
and Sydney, in declining size. In Asia, this
is where the “cloud” actually exists. Prices Data centres 6.30
have stabilised, and the high price of
land is encouraging the redevelopment of Senior housing 6.11
low-end buildings and the repurposing of
brownfield sites. Shared/serviced offices 6.00
Student housing 5.95
That said, the fastest-growing opportunity
is probably in China, which continues to
Affordable housing 5.90
see rapidly rising demand for network
services but which suffers from chronic Business parks 5.61
shortage of infrastructure. “It’s a pretty
unique opportunity that has economics not Self-storage 5.44
associated with the product elsewhere,”
one opportunistic investor in China said. Resorts 4.79
Cash yields in the low teens are achievable,
1 2 3 4 5 6 7 8 9
comparing favourably to Shanghai office Abysmal Fair Excellent
space, for example, which currently
provides sub–4 per cent returns.
Source: Emerging Trends in Real Estate Asia Pacific 2019 survey.
While undersupply exists across the board,
the investor noted, there is a particular
shortage of data-centre space to support Exhibit 1-12 Niche Sectors in Which Investors Are Now Active or
growing cloud data, an area where all of Plan to Be Active in 2019
China’s biggest private entrepreneurs—
Alibaba, Tencent, and Baidu first among
Resorts
them—are looking to capitalise. Beijing
Shared/serviced offices
has only added to the shortage by Self-storage 28%
requiring that all Chinese data be stored 30% 52%
domestically.
Senior housing
China’s data-centre industry also features 41% 46% Data centres
significant barriers to entry. Licensing
is problematic, as is the acquisition of
adequate power supply from China’s 42%
electricity network. Operators with the right Affordable housing 46% Student housing
permissions in place can therefore afford to 43%
be selective in their choice of investors. Business parks
Still, institutionalisation of data centres
Source: Emerging Trends in Real Estate Asia Pacific 2019 survey.
in other Asian nations is also inevitable,
proponents say, just as Asia’s digitisation
is itself unstoppable. South Korea is by
many measures the most-wired nation on
the planet. And in emerging markets such Growth of the data-centre industry in
as India and Southeast Asia, increasing those locations is now fragmented and
numbers of rural or low-income residents fraught with regulatory difficulties. But there
continue to migrate online, usually via remains great scope for rapid expansion of
cellphone data networks. the industry across Asia going forward.
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