Asia Pacific commercial real estate transaction volumes held up remarkably well during the final quarter of 2016, despite the market volatility following Brexit and the U.S. Presidential election result, coming in at US$130 billion, up five percent against 2015. This was supported by strong performance in Singapore (+34 percent y-o-y), China (+24 percent y-o-y), India (+11 percent y-o-y) and South Korea (doubled over 2015 levels). However, Hong Kong (-14 percent) and Australia (-13 percent) were weaker, mainly due to a lack of product, while Japan’s performance was stable.
The 2016 result was inflated by a number of major transactions in various locations. The biggest deal closed during the fourth quarter was the US$2.9 billion acquisition of Century Link in Shanghai Pudong by a fund set up by ARA Asset Management with China Life. This was closely followed by CIC and Brookfield Asset Management’s acquisition of IFC Seoul from AIG Global Real Estate (US$2.3 billion). These two deals, together with Qatar Investment Authority’s purchase of Asia Square Tower One in Singapore (US$2.5 billion), made up the three biggest Asia Pacific real estate deals for 2016.
In the mid-price market segment, regional transaction volumes rose 18 percent against 2015 to US$46 billion. This was largely due to an uptick of activity in the US$50 to US$250 million asset price range, in China (+85 percent y-o-y) and Japan (+46 percent y-o-y).
China had a bumper year with major JLL brokered deals such as the sale of Jinqiao Life Hub (US$825 million), Central Plaza and Parkside Plaza in Shanghai. Others included Blackstone’s purchase of Goodman’s industrial portfolio in Australia (US$487 million), the sale of Capital Square (US$337 million) in Singapore, logistic and hotel assets in Japan, as well as trophy office buildings in India and Malaysia.
The pace of fundraising by private equity real estate (PERE) has slowed with the 32 Asia Pacific-focused funds raising US$11.4 billion in 2016, compared to US$13.2 billion in 2015. That said, the amount of dry powder ready to be deployed regionally increased from US$22 billion in 2012 to US$35 billion in 2016.
Regionally, we expect stable investment volumes at around US$130 billion in 2017, as institutional investors look towards allocating more capital to real estate assets to meet benchmark total returns – according to ANREV, Asia Pacific based institutional investors are still 300 bps away from their target allocation to real estate. Looking forward, the weight of global capital is expected to continue, and we anticipate a flow of cross-border capital to the region mainly through PERE, JVs and direct investments.
The ongoing shortage of stock may continue, however asset disposals will provide opportunities for primary investors and more investors will look at alternative routes such as private REITs, club deals and asset-backed securities. Core markets such as Australia, Japan and Singapore are likely to remain the preferred investment destinations, but we expect stronger activity in India and increased investment interest in Southeast Asian countries such as Vietnam and the Philippines that are showing better prospects on rental growth.
Although we are gradually moving from a low interest rate and low inflation rate environment to a world of higher interest rates and inflation rates, there is still potential for further yield compression in some markets as capital chases opportunities, and yields unlikely to start expanding until 2018 at the earliest.