As Q1 2020 is mired in disruptions to travel, supply chains and business activities due to the unpredictable nature of COVID-19, investors across Asia Pacific have moved into wait-and-see mode. The COVID-19 outbreak is likely to compel many investors to moderate their purchasing this year, according to CBRE’s Asia Pacific Investor Intentions Survey 2020.
However, findings from CBRE’s latest Asia Pacific Investor Intentions Survey indicate that most investors retain a healthy appetite for commercial real estate, with approximately 75% of survey respondents expressing an interest in maintaining or increasing investment activity in 2020. The continued lowering of interest rates in economies across the region will also support asset pricing with potential to see yield compression in major core markets when economies stabilize.
Stable income stream and the higher yield offered by commercial real estate relative to other asset classes has become the key propellant behind real estate investments. Dr. Henry Chin, Head of Research, APAC/EMEA at CBRE noted: “Tokyo’s lower financing costs and attractive yields available has seen it regain its title as most preferred city for cross-border commercial real estate investment, particularly opportunities in logistics and multifamily.” Elsewhere, Beijing eclipsed Shanghai as the most preferred investment destination in Mainland China for the first time, supported by healthy demand and supply fundamentals, with decentralized locations such as Lizu and Wangjing also on investors’ radars.
The responses received after the COVID-19 outbreak saw more investors drawn to prime core assets. Greg Hyland, Head of Capital Markets, APAC, CBRE said: “Investors’ heightened sense of risk aversion is reflecting stronger demand for stable income streams. The lower interest rate environment will ensure real estate yield spread against cost of financing remains attractive. Prime core asset remains an attractive defensive play.” Investors focusing on obtaining higher returns will continue pursuing value-added strategies, while fewer investors will pursue opportunistic deals due to the comparatively high risk involved. Additionally, there is growing interest in distressed opportunities, especially in China and India.
Environmental, Social and Governance (ESG) factors have an increasing bearing upon real estate investment decisions. In 2020, over half of the investors surveyed indicated that they have either already adopted ESG criteria in their decision making, or have plans to do so over the next three to five years. Dr. Chin added: “Recent events and their rapid occurrence have reinforced the importance of building sustainability into portfolios. Whether we observe an increased number of buildings seeking LEED certification or the embedding of sustainability criteria into investment decisions, sustainability is set to become a permanent fixture guiding the behavior of both investors and occupiers.”
In line with investors’ pursuit of long-term, structural opportunities, almost 75% of survey respondents indicated that they are actively pursuing opportunities in alternative assets, with interest in data centers increasing significantly. Dr. Chin said: “With the rising prominence of Big Data, Industry 4.0 the Internet of Things, 5G development and the mainstream adoption of cloud-based services, investors are keen on data centers but are faced with the issue of limited availability. Across Mainland China, India and Southeast Asia, partnering with experienced operators or developers is a viable entry route for investors.” As the proliferation of online grocery and fresh groceries shopping takes places across the region, cold-storage is emerging as a sub-asset class presenting new opportunities for investors.
Office remains the most preferred sector for investment, a trend even more pronounced after the COVID-19 outbreak and is expected to be the first sector to recover. While the Greater China office market will experience a short-term slow in demand, the impact on other office markets across Asia Pacific will be minimal as demand is domestic driven, supported by low vacancy and a lack of new supply. The proclivity toward industrial & logistics assets has become more pronounced. The logistics sector is forecasted to offer a relatively higher gross total return than the office and retail sectors over the next three years (2020-2022). Demand is also being driven by a structural change, with solid e-commerce industry growth creating a need for modern logistics facilities.
“In fact, investors across the Southeast Asia region have already proclaimed their inclination towards industrial & logistics assets, which has overtaken office to become the preferred sector in their quest for higher yields. Among the Southeast Asia markets, Ho Chi Minh City’s growth potential and attractive returns continue to be juxtaposed with Singapore’s market fundamentals stability to be the top two preferred investment destinations1 ,” shared Desmond Sim, Head of Research, Southeast Asia.
As global economic uncertainties pervade the current investment climate, CBRE expects shortterm decision making to be affected. However, the long-term outlook is expected to brighten, with recovery in Asia Pacific outpacing other economies and fueled by spare capital, along with investors’ willingness to explore alternative asset classes and capitalize on structural factors. Sustainability will continue to pervade investors’ decision making in the long term as effects from COVID-19 subside.
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Top preferred cities in Southeast Asia by investors;
1- Ho Chi Minh City
3- Southeast Asia: other regional cities
4- Kuala Lumpur
Source: CBRE Research