Four ways APAC real estate investment has changed since the global financial crisis
The effects of the GFC were wide-reaching, and real estate has been far from immune.
It’s been over a decade since the global financial crisis sent shock waves through markets around the world. But its effects have been felt ever since, and real estate has been far from immune.
In the last decade, the number of real estate deals over US$500 million has more than tripled, and cross-border investment volumes are at a 10-year high.
The rising demand for real estate since the GFC came as investors hunted for yield in an era of low interest rates. Central banks around the globe kept interest rates low and introduced bond-buying programs.
With bond yields depressed and debt cheap, investors sought higher risk and higher return assets like real estate. By the end of 2018, global real estate assets under management hit US$3.2 trillion.
After years of rising asset prices, and increased uncertainty surrounding economic growth, the pace as tempered slightly. But loose monetary policies have remained, a lasting impact of a financial crisis that changed Asia Pacific real estate in four significant ways:
1. Deals are increasingly complex as investors seek to lower risks
Joint venture and secondary fund transactions have risen as sellers and buyers looked to minimise risks and increase competitive advantage. Local knowledge and specialist skills have always been essential for success in real estate, but they have become even more crucial as the investment community seek yield and value in an increasingly global market. In 2018, Asia Pacific real estate transactions through joint ventures reached a record US$44 billion, and this year’s volume will likely reach over US$35 billion.
“Secondary market transactions, which represent the purchase of an existing investors stake in a fund, have also gained in popularity. Such transactions allow the investor to acquire positions at a discount to the net asset value of the underlying assets, in part to reflect the value of liquidity of such stakes. A further benefit is that it enables the buyer to gain exposure to mature portfolios and avoid the so-called “J-curve” of real estate fund investing, where the costs of initial investments impact returns in the early years of a fund's life.
The real estate secondary market saw a record 108 transactions in 2017 – up 10 percent from 2016 – with the deal value totalling more than US$6 billion, according to Landmark Partners, a private equity and real estate investment company specialising in secondary funds. In recent years, the sector has seen transactions from premier real estate institutions, including The Blackstone Group, CalPERS, Harvard Management Company and the Government of Singapore Investment Corporation, which further signalled the legitimacy of the secondaries market.
2.Rising popularity of REITs
In an ultra-low interest rate environment where bond yields are low, REITs have emerged as a popular choice. Strong long-term total returns, combined with other key investment characteristics such as liquidity, high dividend yields, and their potential to increase diversification and to hedge against inflation, have contributed to their appeal.
Between 2009 and 2019, the Asia Pacific REIT market capitalisation has more than quadrupled to US$416 billion. There are currently about 258 REITs listed in the region, compared with 152 in 2009.
While Japan remains the biggest market for REITs in the region, developments have gained pace in many developing countries in Asia Pacific. India’s Embassy REIT, backed by the Blackstone Group, made its debut last year. Meanwhile, China and the Philippines are looking at introducing REITs to help fund domestic real estate developments.
3. Increased M&A
Companies typically turned to mergers and acquisition (M&A) as a strategy to gain scale and profitability quickly.
In the last decade, cheap financing, the increased globalisation of the market place, and rapid technological advancements have led to a rise in M&A volume in the real estate sector.
The rise of Proptech, for instance, has led traditional real estate firms to buy potential start-ups to gain market share quickly. While rapid developments in the e-commerce sector have seen distressed retail malls and industrial properties with warehousing capabilities popular M&A targets. Some of the biggest transactions in the logistics space included Nesta Investment Holdings’ acquisition of Singapore-based Global Logistic Properties, Asia's biggest warehouse operator, for $16.4 billion and Blackstone’s sale of European logistics and warehouse giant Logicor to China Investment Corp for US$13.8 billion
“Many investors around the world are still under-allocated to real estate generally and Asia -Pacific real estate in particular,” says Martijn van Eldik, Head of Funds Advisory – Asia Pacific with JLL. “With all that capital searching for a home in the region’s markets, firms will continue to assemble managers and operating companies as they try to build products that appeal to investors.”
4. Increasing cross border capital
As investors increasingly struggle to find a home for rising real estate allocations, they are looking further afield in the hunt for yield.
Asia Pacific’s share of cross-border deals rose from 14.1 percent in 2009 to 34.2 percent in 2019—a 10-year high. Buyers from the region transacted some US$54 billion worth of cross-border deals by 2019, up from US$10 billion in 2009.
In the third quarter of 2016, China overtook the U.S. to become the largest cross-border real estate investor. The U.S. and Hong Kong were the top investment destinations for mainland Chinese. In 2018, as China struggles with its tariff dispute with the U.S., Singapore replaced the mainland to become the biggest source of outbound capital in the region. In 2019, Singaporean real estate investors remained the region’s top cross-border spenders, splurging approximately US$10 billion on overseas properties in the first half of this year, with their deals growing in scale and complexity.