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December 7, 2016

Given the expected market volatility following Brexit, commercial real estate transactions held up remarkably well during the third quarter of 2016.By volume, activity across Asia Pacific in the first nine months of the year was stable compared to the same period in 2015, and should remain healthy in the final quarter of the year.

In Asia Pacific, cross-border capital is active in core markets such as Hong Kong, Japan, Singapore, Australia and China. Capital flow within the region remained strong, as Asian investors preferred markets closer to home. However, we continued to observe strong appetite from international funds for real estate in the region, as finding value was challenging globally.

China’s retail sector was certainly active throughout the quarter, we saw the sale of The Life Hub @ Jinqiao in Shanghai, the largest ever sale of an on-market retail mall transaction in the country and closed the transaction of the Galleria shopping centre in Chengdu. Good quality and strategically located assets in Australia, as well as the logistics and residential sectors in Japan, continued to attract investors.

The pace of fund raising by private equity real estate (PERE) has slowed year-to-date and it is taking longer time for funds to raise capital. 16 Asia-focused close-ended funds raised US$6.0 billion in the first nine months of 2016, compared to US$9.8 billion total for the same period of 2015. That said, Asia Pacific-focused close-ended PERE funds still retain US$33 billion of dry powder ready to be deployed. Some investors are also seeking other routes to market such as increase allocation to JV/club deals and direct investments.

Seen as a safe haven with relatively higher returns, some of the world’s largest investors are still looking to increase their allocations to real estate. As a result, A grade yields in some markets probe new lows, but positive spreads to risk-free rates should remain. The ongoing search for yields will prompt more investors to look into off-market deals and secondary cities, and to explore newer sectors such as data centres, student accommodation, as well as health and aged care.

Despite greater potential for interest rate rises in the medium term, Asia Pacific real estate should be well placed to deliver strong total returns going forward, underpinned by stable leasing markets. Regionally, we expect stable deal flows in the next 12 months. By market, Singapore should see stronger momentum in investment activity, and increased international capital is projected to enter India, Korea and Southeast Asia. Generally, stable investment activity is anticipated in Greater China and Australia, while activity in Japan may fall short of this year’s level due primarily to continuing stock shortage.

Stuart Crow, Head of Asia Pacific Capital Markets, JLL
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