Why real estate investors are still confident
Investors remain committed to the long-term growth fundamentals of Asia Pacific
As economic uncertainty hampers deal-making in global real estate markets, investors remain confident that a recovery in deal volumes in Asia Pacific is only months away.
Widespread lockdowns and travel restrictions stalled investors' plans so far this year, with commercial real estate investment falling 29 percent globally to US$321 billion in the first six months of 2020 compared to the year-earlier period, according to data from JLL. Throughout the same period, volumes in Asia Pacific contracted 32 percent, as the impact of COVID-19 was felt on investment markets.
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But 84 percent of real estate investors expect transaction volumes in Asia Pacific to rebound meaningfully by early 2021, according to a JLL poll of 38 global investors representing close to US$2 trillion in assets under management. Optimism is being further buoyed by signs of a sustained recovery in China. Select investors remain more bullish, with 32 percent confident that the market hit its trough in the first half of 2020.
Such confidence isn't unique to real estate. Stock markets have raced higher in recent months despite the pandemic, with analysts citing a confidence that the worst of the pandemic may be over, and hefty central bank stimulus.
"Believe it or not, investors aren't mired in doom and gloom," says Stuart Crow, CEO, Capital Markets, Asia Pacific, JLL. "There are challenges, but many are looking ahead to refocus their Asia Pacific investment strategies on core geographies and sectors that are benefiting from the acceleration of pre-COVID trends."
Defensive locations and sectors are among highest in demand, he says. Japan and Korea remain top of the list, as do sectors such as multifamily, non-discretionary retail, and logistics.
The survey identified Japan, South Korea, China, and Australia as the markets most likely to see an increase in transactional activity into 2021 as investors turn to core geographies as a defensive strategy to mitigate ongoing risk.
The relative stability and transparency of the Japanese market as the world's third-largest economy, sees 56 percent of those surveyed planning to increase their exposure in 2021, cementing its status as a safe-haven destination, where income and capital value returns are relatively more stable. Meanwhile, despite China's domestic economy slowing before COVID-19, investors polled are looking past short-term headwinds to the longer-term growth potential of the market, with 51 percent planning on increasing their exposure to the country within 2021.
"As transactional activity increases and pockets of value emerge from the crisis, we expect investors to move up the risk curve, which will include both direct and indirect exposure to real estate," says Crow.
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Although direct acquisition in private markets will remain the primary route for most investors polled, many are increasingly looking towards different transaction structures to gain and increase their exposure to real estate. Sizable numbers of investors are planning to increase exposure to platform deals (32%) or increase their activity in debt markets (29%).
"COVID-19 is changing how investors access real estate," says Roddy Allan, Chief Research Officer, Asia Pacific, JLL. "While we typically see a shift to more stable risk profiles during times of uncertainty, many investors are signalling a longer-term diversification strategy in Asia Pacific but are also reimagining how they transact in this region."
Defensive sectors
As the COVID-19 pandemic continues to rage, investors are balancing existing portfolios with defensive, operationally-critical sectors.
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"As the office sector adapts to the next future of work, alternative sectors that are benefitting from demographic, technological and social development trends are set to benefit, particularly living, logistics and data centers," says Crow.
Logistics, widely cited as the crises' most resilient sector thanks to the growth of e-commerce during lockdowns, is likely to become even more attractive into 2021 with over 80 percent of investors surveyed looking to increase their exposure.
Multifamily is also positioned to play a significant part in the transactional rebound, with 58 percent planning to expand investment as housing shortages and affordability pressures persist in the region's major cities.
The region's maturing alternatives sector, comprising of data centres and student living amongst others, will also generate continued interest, with 44 percent of polled investors to enhance exposure within 2021.
"Defensive investments will play a bigger role in this cycle, given ongoing uncertainty. However, the very definition of defensive will continue to evolve to include greater exposure to stable alternative assets," says Crow.
Contact Stuart Crow
CEO, Asia Pacific capital markets, JLL
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