North America has long been the most popular destination for institutional investor capital, especially among American and Asian investors. However, the progressive rise in U.S. interest rates – and the prospect of more to come – are deterring some investors from expanding rapidly in the country, prompting a potential reallocation of capital towards markets in Asia Pacific.
“Transaction volumes in the APAC region were up 20 percent year-on-year to Q3 2018, with full year volumes expected to set another record,” says Nick Wilson, Director of Asia Pacific Capital Markets Research. “The growth momentum will likely slow in 2019, but we still forecast an approximately 5 percent rise in overall transaction volumes.”
Hong Kong and Korea experienced the strongest growth in 2018, but signs of negative sentiment in Hong Kong suggest volumes will remain flat or decline through 2019, says Wilson.
Meanwhile, foreign investor interest in Korea continues to build, as a mixture of attractive funding costs and healthier relative yields attract income seeking investors.
Investment interest in Japan has picked up, reflecting the downside risk protection the country’s safe haven status offers. However, some investors have concerns around pricing in the market.
In Singapore, the pipeline is looking healthy for next year and a number of mega-deals are expected to support transaction volume growth. By contrast, China could go either way.
“Mixed underlying fundamentals and uncertainty around U.S. trade policies are impacting investor sentiment about China,” says Wilson. “However, a large capital pool is still looking to deploy, so there could be more trading on the back of diverging market views.”
APAC logistics and alternative assets stand out
Sectorally, areas with either defensive qualities or that run on less cyclical demand drivers are likely to present the best opportunities at this point in the cycle, says Stuart Crow, Head of Asia Pacific Capital Markets at JLL.
Logistics has a strong long-term outlook in particular. Asia leads the world in e-commerce, with plenty of scope for future growth given the low e-commerce penetration rates, strong urbanisation trends and favourable age demographics across South-East Asia and India.
“Logistics has become a crowded market from an investor standpoint, so there will likely be more concentration of ownership longer-term as major developers take more market share from smaller players.”
Alternative asset classes are another one to watch, says Crow.
“Investors conducted a lot of tyre kicking in 2018, suggesting the coming year could see an uptick in transactions.”
“Interest has so far centred around the various living categories, so we anticipate a lot more activity in student housing, co-living, aged care and other service-based residential strategies that have good defensive qualities.”
Search for yield
Investors have also been more active in city fringe areas, B grade assets, and tier two cities in the continued hunt for yield, focussing on markets with rental growth, says Wilson.
“On that basis, we expect volumes in office markets in cities such as Osaka and Guangzhou to lift next year.”
Distress also offers evolving opportunities, with more transactions in this space forecast in the coming year.
“We’re already seeing a number of traditional real estate investors starting to sharpen their knife for the NPL books we expect to see in 2019, with NPL volumes likely to lift next year in both China and India – albeit for different reasons,” says Wilson. “India has some pockets of distressed residential developers, creating opportunities to land bank development sites or buy up NPLs at steep discounts.”
More equity market volatility through the coming year may offer further opportunities in public to private M&A as well.
“Private equity funds have been active on the M&A front this year, and with PE dry powder in Asia pushing close to US$40 billion we expect that to continue next year,” says Wilson.
U.S. ripple effect
With the market now pricing in just one U.S. interest rate hike for 2019, capital outflows and pressure on emerging Asian markets should ease next year, given some of the currency pegs or soft pegs Asian economies have with the U.S.
“A slower pace of rate hikes could help to buffer against any yield decompression shocks and allow for occupier markets to offset some of the pressure on cap rates moving out,” Wilson says.
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