Asia Pacific commercial property investment reaches US$41.9bn in Q3 2021

Asia Pacific commercial property investment reaches US$41.9bn in Q3 2021

Asia Pacific commercial real estate market grew 12% year-on-year to US$41.9 billion in the third quarter of 2021, bringing the year-to-date total to a new record, according to the Real Capital Analytics’ (RCA) latest Asia Pacific Capital Trends Report.

Deal volumes have now grown consistently over the past twelve months, with domestic investors driving the most recent phase of the recovery, said RCA.

Third quarter acquisitions of income-producing property reached US$41.9 billion, bringing transaction volume for the first nine months of the year to a record US$137.4 billion.

The year-to-date tally is a 25% increase on the same period last year and a 16% increase on the average for the same period in the five years before the pandemic. Additionally, the pipeline of pending deals at end-September was over US$68 billion, double what it was two years ago.

David Green-Morgan, RCA’s Managing Director for Asia Pacific, said: “We have seen sustained growth during 2021 as the recovery from the pandemic has broadened and deepened across the region. Importantly, we are not just seeing growth over 2020 activity, but also above the longer-term average, meaning that 2021 could be a record year and continue the longer-term expansion of the investment market in Asia Pacific.”

Most Active Markets in Asia Pacific

After a subdued first two quarters of 2021, office deal volume reached a high of US$22.7 billion in the third quarter, bolstered by trading of CBD assets. The largest office deal globally of 2021 so far was the US$2.4 billion sale-leaseback of the Dentsu headquarters in Tokyo, which closed in September. In Seoul, US$12.7 billion of offices have changed hands in the year so far, making it the biggest office market worldwide this year.

The retail sector too had a strong showing, with renewed appetite seen for larger malls and centrally located properties. In July, a Charter Hall REIT teamed up with Abacus Property for a US$200 million stake in the Myer Melbourne CBD store, while two of the malls Aeon REIT acquired in Japan in the third quarter were over 100,000 sqm in size.

Benjamin Chow, RCA’s Head of Analytics for Asia, said: “What’s interesting about Asia Pacific’s recovery is how much of it has been driven by office and retail investment. This stands in contrast with the U.S., where industrial investment has overtaken the office sector, and Europe, where neither sector has recovered from last year’s troughs. Growth in this part of the world has been broad-based and well-distributed across the office, retail and industrial sectors.”

 Acquisition by Property Type

More than US$10 billion of properties traded in South Korea in the third quarter, making it a record quarter and placing South Korea at the top of the APAC leaderboard. For the year so far, deal volume reached US$27.4 billion – more than double the average activity seen before the pandemic for the first nine months of a year. Domestic institutional investors were behind most of the increase.

Benjamin Chow, RCA’s Head of Analytics for Asia, said: “South Korea is by far the fastest growing major investment market in the world at present. Seven of the past eight quarters have set new records for investment volumes, while pricing has surged 20% over the past year. So much of this is tied to the incredible appetite that Korean investors have had for commercial real estate – over the last few years they have overtaken the Singaporean, Japanese and even mainland Chinese investors in terms of their combined spending both domestically and abroad.”

Trading of Australian property totaled US$8.5 billion in the third quarter and US$24.8 billion for the first three quarters of the year. The year-to-date tally is 21% higher than the average seen pre-Covid. Dealmaking in the industrial sector was subdued in the third quarter after a strong showing earlier in the year; instead, offices and retail deal activity came to the fore.

David Green-Morgan, RCA’s Managing Director for Asia Pacific, said: “Australia’s recovery was one of the strongest in the region, with virtually every sector seeing gains. A noticeable feature is the emergence of a number of alternative sectors including healthcare, childcare, self-storage and pubs.”

Investment in Singapore tallied US$1.0 billion for the third quarter, bringing volumes for the first nine months to US$5.8 billion. The year-to-date tally has now recovered in line with the five-year pre-Covid average. Few large deals closed in the third quarter, but activity has been picking up at the smaller end of the market. So far this year, 90 deals over US$10 million were recorded, more than double last year’s count.

Benjamin Chow, RCA’s Head of Analytics for Asia, said: “Singapore has perennially been a target for some of the world’s largest institutional investors. Cross-border inflows started off this year very strongly, but momentum has slowed as the city-state struggled with re-opening the economy and borders in the second half of the year. That hasn’t stopped Singaporean investors from looking abroad – they have now grown to become the most active source of Asian capital this year, both within the region, as well as at a global level.

Transaction activity in China showed no sign of faltering in the third quarter, despite fears of a financial market fallout from indebted developers. Domestic investors have been behind much of the growth in volumes this year. Cross-border and institutional investors maintained their activity in the business park segment this year. For the year so far, trading volume of income-producing properties reached US$35.0 billion, making it the largest country market in the region in 2021.

Benjamin Chow, RCA’s Head of Analytics for Asia, said: “While attention may fall on a small, select group of developers that are still in the midst of deleveraging, the reality is that the rest of China’s economy, as well as its investment market, is looking ahead. The need to downsize balance sheets has allowed owner-occupiers and domestic institutions to pick up a number of high-quality assets hitting the market. The increased supply has resulted in an easing of office pricing in the major cities, and deal-making has continued to grow at a steady pace.”

Tokyo lost its place as the number one metro market in the region despite the largest single-asset deal of the year transacting in September. Hulic and Mizuho Leasing bought the Dentsu headquarters for US$2.4 billion in a sale-leaseback deal. Office prices across the major cities have resumed their ascent, with yields in Tokyo, Osaka and Nagoya tightening by 10-20 basis points over the past year.

David Green-Morgan, RCA’s Managing Director for Asia Pacific, said: “Japanese volumes have been plateauing for several years now and it looks as though it will be 2022 before we see any meaningful increase in transactional activity. Still, the turnaround in office pricing after a period of stagnation last year is welcome news for most investors.”

Hong Kong deal volumes fell 38% year-on-year in the third quarter, the first contraction after four consecutive quarters of expansion. The number of deals in the first nine months doubled from last year, recovering to levels in line with 2019. Cross-border investment remains lacklustre, but domestic investment continues to recover.

Benjamin Chow, RCA’s Head of Analytics for Asia, said: “Hong Kong’s third quarter decline was largely attributable to a lack of big deals that closed within the quarter. Investment at the other end of the market is still growing with deals below HKD 500 million having doubled in volumes compared with last year. The composition of capital flows has shifted yet again this year, with mainland Chinese investors staying away, while those from the US, UK and Singapore have returned. Interestingly, almost every notable cross-border deal this year has involved an industrial property, a sector that overseas players have traditionally avoided.”