APAC region’s $45b commercial realty investment is at an all-time high

Real estate investors in the Asia Pacific (APAC) region had reasons to cheer.

Investments in the commercial real estate sector set a new record of $45 billion between January and March 2019 (Q1/2019), a 14 per cent jump from the corresponding period last year, according to a report released by real estate consultant JLL.

The growth in the APAC region is buoyed by an increased number of transactions in China that accounted for approximately 40 per cent of the region’s transaction value.

The Asia Pacific performance is rather impressive when compared to the global scenario. Globally, the year-on-year real estate investments declined 8 per cent to $156 billion during the quarter.

According to a JLL prediction, global investments in the sector is expected to plunge by about 5-10 per cent in 2019, to roughly $690 billion and the slowdown can be attributed to the slump in the American and EMEA region, particularly in the retail and office sectors. Meanwhile, Asia Pacific is projected to outperform.

Cross-border capital boosts China growth

In China, the total value of transaction in the January-March quarter stood at $17 billion, double of Q1 2018. The country this year witnessed some mega deals such as the $1.6 billion sale and leaseback agreement between online retailer JD.com and Singapore sovereign fund GIC, and the $1.3 billion acquisition of Dinghao Plaza by European private equity firm Partners Group.

These large-ticket transactions contributed significantly to the surge in APAC investments.

China is increasingly evincing interest of international investors, thanks to the government’s focus on ‘deleveraging’ that in turn has impacted the availability of credit for local borrowers, pushing some owners to divest assets in order to reduce debt, said Stuart Crow, CEO of Asia Pacific capital markets at JLL. “Coupled with the move to open its financial markets to foreign investors, these have facilitated greater cross-border flows into China,” he added.

External capital, mostly from Singapore, the US and global private equity firms, accounted for nearly half of Chinese real estate transaction volumes.

Three Chinese cities, Shanghai, Beijing and Shenzhen, were amongst the 10 biggest recipients of cross-border capital in the first quarter of this year. To breakdown the numbers further, Shanghai received $2.6 billion foreign capital, while Shenzhen drew close to $1 billion in foreign investment.

“Cross-border investors were active particularly in Shanghai as tech, financial and professional services firms continue to chase premium office space. We foresee that financial institutions will further accelerate demand and become a major driving force in Shanghai’s leasing market over the next six to 12 months. Many investors outside China are also targeting assets in Shenzhen to capitalise on future growth, thanks to development guidelines by the government to develop the Greater Bay Area,” said Crow.

And, this is not all.

It may be worthwhile to note that China, going forward, is also slated to top outbound investments to London’s real estate sector.

As much as 74 per cent of M3 Consulting survey respondents said that going forward the largest source of inward investment into the city will be from Asia, wherein China is expected to be the primary source of investment.

Upticks in others

Real estate investments continued to expand in several other Asian markets as well, according to the JLL report. Singapore scored a 71 per cent rise year-on-year, while South Korea saw an uptick of 28 per cent.

Meanwhile, usual strong performers such as Japan, Australia and Hong Kong lost their pace in the investment activity chart in the January-March 2019 quarter . The bright spot, however, is that Tokyo remained the ‘liquid market’ in the world.

For the uninitiated, a ‘liquid market’ typically refers to a market that is always available, clear and free-flowing. In Japan, nearly 83 per cent of real estate deals came from domestic groups, primarily corporates and J-REITs. Acquisitions by J-REITs in the quarter were up 30 per cent than the quarterly average since 2014.

Recovery is also happening in Hong Kong, as buyers are after retail assets located beyond traditional core districts.

“Overall, there will be a good pipeline of deals coming into the major markets in Asia Pacific over the next few months. We’re maintaining our forecast of a slight increase in transaction volumes from last year, coming in at around $170 billion by the end of 2019,” said Crow.

However, a word of caution: Even with the new highs in investment activity, the dry powder in Asia Pacific is accumulating as fundraising continued to witness a northward surge. Closed-end private real estate funds focusing on the region raised an aggregate of over $42 billion.

The report indicates that while allocations are on the rise, approximately 60 per cent of institutions remain underinvested relative to their targets. Institutions from Asia Pacific are the most underinvested, by about 120 bps, relative to their target.

Meanwhile, a large majority of investors in both EMEA and Asia Pacific said they intended to invest outside their home region, according to a Q1/2019 real estate fundraising report by Preqin.