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The rental-housing market is booming across the Asia-Pacific region, signalling a willingness among major investors to push into new real-estate sectors.

Investors have piled US$15.1 billion into the multifamily sector throughout the first three-quarters of 2017, an 87 percent increase from the same 2016 period. The surge has vaulted multifamily investment volumes over spending on the industrial sector for the first time in seven years.

Two big reasons driving the investment push: a hunt for new opportunities due to the lack of options in other asset classes, and an expanding affordability gap in major cities that has made renting more attractive.

“This will be a long-term trend,” said Nick Wilson, Head of APAC Capital Markets Research with JLL.

In many countries, the trend is just starting. In the U.S. and Canada, huge companies owning hundreds of thousands of units dominate the multifamily sector. But elsewhere, rental-housing markets remain far more fragmented.

This is starting to change. While the multifamily sector is a relatively new asset class in countries such as Australia and China, “there are a lot of investors that are dipping their toes in the water to see if they can make the investments work,” Wilson said.

The push from investors comes amid an acute shortage of affordable rental housing in fast-expanding cities. Some governments have responded with incentives for developers, such as reserving land sites specifically for rental housing, and offering various tax incentives.

The China bull
Demand for multifamily in China has been particularly strong this year, boosted by the government’s attempt to build more rental housing.

The Chinese housing market traditionally has been dominated by homeowners. But as prices have shot higher in major cities like Beijing and Shanghai, more people have sought out rental options.

Much of this market is dominated by the growing number of 20- to 35-year-old workers living in cities looking good locations at more affordable prices.

“Some land sites are being sold with a caveat: The apartments can’t be sold individually,” Wilson said. “Sometimes the government also offers better planning terms for developers that want to develop rental property.”

However, most land sales have been to government-backed developers. And while a number of institutions – including Vanke, Gaw Capital Partners and Warburg Pincus – have bought into the growth prospects, the market remains challenging for many foreign investors.

Regional opportunities

Japan, with a much more mature multifamily market, has not experienced the same levels of relative growth. However, it remains the largest market in the region in terms of volume of stabilized yielding investments.

“The Japanese model is primarily for no-frills small units, which provides a lot of affordable housing and offers good yields for investors,” says Wilson. “In particular, the Tokyo/Fukuoka multifamily market still offers the best investment opportunities at this point: solid yields, good downside risk protection, and investors can leverage it well to get the returns.”

Australia is also exploring ways to develop a proper multifamily rental housing market at an institutional level. But developers will need to be creative in their product offering as domestic negative gearing tax incentives for Australian residents makes private investors very competitive on pricing.

Standard apartment cap rates are relatively low in Australia so developers will need to come up with a new rental format or work closely with state government to help improve the economics of the sector.

Click to read more about multi-family investment.

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Nicholas Wilson

Director, Corporate Finance & Debt Research Asia Pacific Capital Markets

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