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The structure of real estate investment in Asia has changed greatly

0403-2024
As institutional investors move from office to logistics and residential real estate, the structure of Asian real estate investment has changed.
 
 
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The office temporarily "lost its luster"

The above trend shows that the office sector performs better in high-context cultures such as Japan and Korea.

Regina Lim, head of real estate research in Asia at Singapore-based asset management company M&G Real Estate, said that real estate portfolios in APAC usually have 40-50% offices, but this number could decrease to 20-30% in the next 5 to 10 years.

“Institutional investors are thinking there are a lot of problems with this asset class and we have to be more flexible. We have to be aware of the decarbonization regulations and it will affect the office more,” she said.

.“We have seen this before, where people used to have 40-50% of their portfolio,” she added. They focused on retail real estate and over the past 10 years, they have reduced this ratio to 20-30%.

Ms Lim believes office real estate still has value even if people only work a few times a week.

“During your 5 working days, you can go to the office 1,” she said. It does not mean we only need 1/5 of the current number of offices."

Additionally, the gap has narrowed over the past year between the extent to which employers want employees to work in the office and the extent to which employees want to be in the office.

High-context cultures such as Japan, Korea, and China, Ms. Lim said, prefer to go to work to meet face-to-face and workers have returned to the office quite quickly.

Chiang Ling, CIO of the Asia division of real estate investment management company Hines, a $100 billion asset management company, agrees. She believes that the office market in APAC is better thanks to "offline working that is less dependent on long-distance and smaller housing sizes". She also commented, "The number of jobs continues to increase and will compensate for the decline in office demand due to working online at home."

In addition, the office segment in many markets is starting to experience supply constraints, which is causing the value of office space to decrease significantly.

Ms. Ng said. “Across Asia's developed economies, the number of offices under construction is falling sharply and is now low as a percentage of available supply.”

Logistics real estate is a big magnet

M&G's Ms. Lim said that despite disruptions to global supply chains, the logistics sector in APAC continues to be attractive to real estate investors. It is the modernization process that has been creating many changes in this field.

She added that the majority of activities involve logistics such as assembling, distributing, sorting and packaging products. It's all now automated. Therefore, it helps improve efficiency and boost retail consumption, and boost demand for logistics space.

“We're not seeing vacancy rates go up, we're not seeing rents go down because companies are modernizing their operations,” she said. In other words, modernization is driving demand for logistics real estate.”

In addition, companies have begun to diversify production activities to avoid dependence on a single source such as China. This has benefited markets like Japan and South Korea, “where a lot of components used to be shipped to production.”

For example, when TSMC in Taiwan looked for a new manufacturing location, “they found that Japan had components and suppliers that no one else had. This country also has a very good quality control system and a very professional number of employees. In fact, salaries are quite low compared to other countries by global standards.”

Ms. Lim added: "It is no wonder that the Japanese government is focusing on this area."

According to Bloomberg, in November 2023, the Japanese government plans to allocate 13.3 billion USD to support the country's semiconductor production.

On February 6, TSMC said it would build a second semiconductor factory in southwestern Japan and begin operations in 2027. Therefore, it will raise total investment in Japan to 20 billion USD “from the Japanese government”.

Brad Fu, CEO of Heitman, said specialty logistics and self-storage real estate in APAC is also attractive right now. For example, cold chain logistics facilities are in short supply. It is operating at full capacity like Hong Kong. Meanwhile, the Australian market is also extremely promising in 2024.

Macro trends

Abhi Shroff, Vice President of asset management company Cohen & Steers in Singapore, said real estate investment activity in APAC has slowed in 2023, but institutional investments are expected to increase this year.

According to real estate services company Jones Lang LaSalle, the total volume of real estate investments in this area has decreased over the past three years. It drops to $106.8 billion in 2023, from $129.2 billion in 2022 and $177 billion in 2021.

“We can think of data centers, luxury homes, single-family homes, and rental homes as “new generation” real estate sectors, Shroff said.

He noted that there is currently a huge demand for renting homes, especially among people between the ages of 20 and 40. “They want to buy a house but can't afford it,” he said. But they still want to leave their parent's house and live independently, so renting is increasing." The real estate market is greatly affected by interest rates, which has limited new buyers, he added.

Heitman's expert, Ms. Fu, also agreed with this point of view. She said the Bank of Japan's ultra-low interest rate policy has made the real estate market more attractive to investors because interest rate differentials are kept at a positive level and cash yields are attractive.

“The Japanese Yen is trading near its lows against the US dollar,” she said. This is an attractive point for foreign investors."

“We have housing projects in Tokyo as well as Osaka. We were surprised by the rental growth after the extension."

“Across various real estate sectors in Japan, fundamentals remain strong. Rent growth is forecast to increase rapidly due to stable demand, limited supply, and a slow development roadmap."

Over the next few years, Mr. Shroff forecasts that Asian real estate owners are looking to increase their allocation to real estate by 2-3%.

“But there are changes, for example, more and more people are looking for property abroad - this is quite a big trend across Asia.”

Large Asian institutions such as pension funds and sovereign funds are shifting their real estate allocations overseas to diversify their portfolios. Some funds often begin with allocations to domestic real estate. However, over the long term, as the size of their portfolio increases, this strategy becomes unsuitable because of its lack of diversity.

They often shift capital to the United States, which is the largest market for listed and unlisted commercial real estate, as well as other developed markets. Some investors also invest in other Asian markets but this is "often risky".

 
 
 

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