<article>In any economic cycle, real estate has remained a mainstay in investor portfolios around the world. Asian investors, too, maintain a strong interest in the asset class.</article>

In any economic cycle, real estate has remained a mainstay in investor portfolios around the world. Asian investors, too, maintain a strong interest in the asset class.
“There’s a growth of wealth in Asia and we’re seeing more capital accumulated by Asian investors. In the early days of outbound investments from Asia, most of the capital came from Singapore, Indonesia, Hong Kong and Japan. Their key gateway cities for real estate investments were London, New York, San Francisco and Sydney.
“Post global financial crisis, we have the mainland Chinese investors coming on to the investment scene. With the Chinese investors coming into play, there’s a lot of capital competing for investments and in Asia, the Chinese particularly have close affiliations with real estate. Hence, when they go outbound, they like to invest in real estate,” said Terence Tang, managing director for capital markets and investment services in Asia at Colliers International.
He noted that one of the main factors that make real estate attractive as an asset class is its relative ease of management.
&#8220;Real estate gives investors full control over their investments and in some cases, they can be passive with their investment, as in office buildings and vacant land. As passive as possible with income generation &#8211; it’s something that Asian investors love,” added Tang.
“We are seeing a rebalancing of portfolios away from equities toward more defensive asset classes. While cash, gold and private equity are likely to be increasingly targeted, investment-grade property with strong tenant covenants will also see significant interest over the next 12 months,” said Knight Frank Asia Pacific research head Nicholas Holt in a Bloomberg report.
Tang added that when it comes to real estate investments, family offices and institutional investors behave differently, although both are equally driven by investment returns.
“London, traditionally, has been very attractive but with Brexit coming into play, Asian funds and institutional investors are starting to shy away from the UK. Interestingly, family offices are willing to take a longer view of the UK market and remain interested.
“Family offices and individuals have a much longer-term view in their investments and they go with asset classes and locations that they’re more familiar with. They prefer to take fewer risks and have lower return expectations. But if they come across local partners that they’re comfortable with, then they might take higher risks to get higher returns by going into niche areas like retail properties,” he added.
<h3>CEE getting more attractive for investors</h3>
<a href="https://media.dealstreetasia.com/uploads/2019/04/image007.jpg"><img loading="lazy" decoding="async" class="aligncenter wp-image-129363 size-full" src="https://media.dealstreetasia.com/uploads/2019/04/image007.jpg?resize=640,412" alt="" srcset="https://media.dealstreetasia.com/uploads/2019/04/image007.jpg?w=791 791w, https://media.dealstreetasia.com/uploads/2019/04/image007.jpg?resize=300,193 300w, https://media.dealstreetasia.com/uploads/2019/04/image007.jpg?resize=768,494 768w" sizes="(max-width: 791px) 100vw, 791px" data-recalc-dims="1" /></a>
Beyond the usual key gateway cities, Asian investors are starting to have an increased appetite for Central and Eastern Europe (CEE). In a recent report by Colliers International, East Asian investors from Malaysia, South Korea and the Philippines emerged as new buyers of commercial real estate in the CEE.
Singapore remains the prime source of capital into CEE, perhaps due to the city-state’s high GDP per capita and high valuation of local real estate per capita. Singapore’s sovereign wealth fund <a href="https://www.reuters.com/article/p3-ma-gic-pte-idUSL4N1D812W">GIC acquired European logistics firm P3 for $2.7 billion</a>, which was the largest European real estate deal in 2016. Meanwhile, Chinese money flowing into CEE diminished to EUR 60 million in 2018 due to capital flow restrictions imposed by its government in 2017.
According to BNP Paribas Real Estate, in 2017, cross-border investments from Asian and Pacific investors reached €26.4 billion, an increase of 95 per cent from 2016. The countries that particularly attracted these investors were the UK (€14.7 billion), Germany (€5.6 billion), Finland (€1.5 billion) and Poland (€1.1 billion).
Savills noted that Europe remains an attractive investment proposition for international buyers, particularly Asian investors, supported by its expanding economy, low unemployment rates and healthy demand from occupiers.
The slowdown of Chinese inflows is being counterbalanced by increased diversity in terms of sources of capital, with these investors considering an ever broader range of assets and markets, it said.
There are a few reasons as to why Asian investors are flocking to the CEE region. According to Colliers International CEE research specialist Mark Robinson, fast GDP growth in the region’s countries, due to wage cost competitiveness, productivity gains and the expansion of the service sectors in the economies, looks set to be the case for the long-term.
“The region’s economies have expanded faster than their western European counterparts since the 1990s: this long-run ‘convergence’ phenomenon looks set to continue. Commercial real estate as a vehicle works as an exposure due to long-run growth of rents, and, more slowly, the compression of real estate yields towards western European levels.
“A reduction of cost of debt, as the CEE markets become more liquid and the perception of risk improves, should aid also the compression of yields and increased liquidity. Yields are higher because they have always sat at large premiums to Western European peers, due to the markets having lower liquidity and higher perceived risk,” Robinson told DEALSTREETASIA.
Colliers managing director and head of CEE Investments, Luke Dawson, added that the low yields being seen in Germany, Paris and other major cities in Western Europe are making it harder for investors to achieve returns. This is why pricing in CEE appeals to investors wanting to further diversify their global portfolios.
On top of that, China’s One Belt One Road strategy will benefit CEE as several markets in the region form some of the strategy’s key intersections.
“CEE should be a large beneficiary of the ‘One Belt One Road’ strategy which will appeal to Chinese investors. Will we see Asian investors stick to the capital cities of Warsaw, Prague etc or diversify to second-tier cities? This will depend on future infrastructure plans for the region,” said Colliers International&#8217;s global cross-border investment head Richard Divall.
Tang concurred, adding that some Chinese investors are leveraging the Silk Road route to back warehousing and logistics opportunities.
So what are the hot sectors favoured by Asian investors? Offices, hotels and most recently, retail are catching up with the massive interest in logistics. East Asian investors have tended to favour larger deal sizes and are thus inclined towards CEE’s more liquid markets such as Poland and the Czech Republic, according to Dawson.
“There is some appetite for alternative sectors such as senior living and student housing if deal sizes in these areas increase. Debt is also proving an attractive sector to deploy large scale capital. Although debt is expensive, it remains attractive to investors due to a higher degree of certainty for returns,” he said.
<h3>Zooming into Poland</h3>
Among the markets in CEE, Poland appears to be the most popular among Asian investors. For instance, Malaysia’s largest pension fund <a href="https://www.dealstreetasia.com/stories/malaysia-epf-polish-mall-98413/">Employees Provident Fund (EPF) had purchased a retail mall</a> in the market for close to $351 million (EUR 300 million) last year and Singapore’s Mapletree had acquired a <a href="https://www.dealstreetasia.com/stories/singapores-mapletree-acquires-1-1b-logistics-portfolio-in-us-europe-from-prologis-108028/">$1.1 billion logistics portfolio from Prologis Inc</a>, which has assets in the US, Paris and Warsaw.
Poland’s population base of a million, wider demographic base in terms of city size and larger share of domestic demand as a proportion of GDP are all factors in favour of a more liquid commercial real estate marketplace, said Robinson.
“Growth dynamics are strong, due to a high level of domestic investment in the economy, the deployment of EU funds into infrastructure and fast development of the service sector. Poland’s GDP growth has been above trend for the past few years, registering 5.1 per cent in 2018, with an expectation of a moderate slowdown to a still above-trend 3.3 per cent rate (estimation) in 2019. Inflation is very muted, at just 1.2 per cent year-on-year on the last reading.
These factors fed into decent rental growth in office markets in 2018, with average rents in Warsaw’s central business district (CBD) up 5.6 per cent in the year.
Another market that is favoured by many Asian investors including the likes of CapitaLand Group, Gaw Capital and Warburg Pincus-backed ESR is the Chinese market that has much more liquidity relative to CEE, noted Divall.
Actual prime office yields stood at 3.6 per cent in Shanghai, 3.8 per cent in Shenzhen and 3.9 per cent in Beijing at the end of Q4 2018. The equivalent prime office yields in Warsaw touched 4.6 per cent, 4.75 per cent in Prague, 5.75 per cent in Budapest, 6.0 per cent in Bratislava, 7.25 per cent in Bucharest and 8.0 per cent in Sofia.
“China’s greater liquidity can be seen by looking at yield premiums over funding rates, with, for example, the premium for prime assets in the Beijing office market standing at 0.6 per cent and even lower in Hong Kong at 0.4 per cent and Shanghai (0.2 per cent). The lowest premium for equivalent prime office assets in the CEE region is in Warsaw, at 2.7 per cent, followed by Prague’s 3.2 per cent.
“We believe we are likely to see more liquidity within the CEE region, likely forcing the yield premiums downwards. Foreign involvement in these markets should continue, as all of the major markets are within the EU and some are even in the Eurozone. A greater dynamic should come through the growth of local mutual funds in Czech, Slovak and Hungarian markets and hopefully Poland going down the REIT route, opening the commercial real estate market more to the pool of equity investors,” he said.
Also Read:
<a style="color: #ff0000;" href="https://www.dealstreetasia.com/stories/malaysia-epf-polish-mall-98413/">Malaysia’s EPF acquires Polish retail mall for $351m</a>
<a style="color: #ff0000;" href="https://www.dealstreetasia.com/stories/singapores-mapletree-acquires-1-1b-logistics-portfolio-in-us-europe-from-prologis-108028/">Singapore’s Mapletree acquires $1.1b logistics portfolio in US, Europe from Prologis</a>

Beyond the usual key gateway cities, Asian investors are starting to have an increased appetite for Central and Eastern Europe (CEE).

Where are Asian investors making their real estate bets?

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