As published in the PERE APAC Guide, August 2021.
Prime office assets have weathered the pandemic reasonably well, in part owing to the resilience of the underlying tenants from the banking, insurance, and technology sectors, which were better equipped to adopt remote working models. Furthermore, in comparison to Europe and North America, a higher percentage of office workers in Asia favour a full return to the office over a hybrid model. We observed that office rentals appear to be stabilizing following declines across the region in the last year. The “S” of ESG is also expected to feature strongly for the office sector in future, with spaces that promote employee well-being as well as an increase in social and collaboration areas being incorporated into occupier needs.
Real estate sectors reliant on the movement of people and consumption habits such as hotel and leisure, retail and entertainment were hardest hit. Nevertheless, the sector still presents several opportunities for investors and asset managers. Whilst some investors reduce exposure, widening yields offer opportunity. This dynamic has probably contributed to robust transaction volumes being seen in H1 2021, particularly in China, Australia, and South Korea. The $1.4bn portfolio sale of Chinese retail assets from ADIA to Brookfield is a notable transaction for a portfolio which has reportedly weathered the pandemic, underscoring the point that there are variations in the fates of assets depending on location and tenant mix amongst other factors.
The logistics sector is the clear ‘winner’ from the pandemic as e-commerce saw a dramatic increase. There is an immediate undersupply of assets and unsurprisingly, the market has seen hot competition for assets and many winning bids are well in excess of quoted market values. This has resulted in yield compression, but the sentiment from asset managers we have spoken with is that there is still room for income growth and thus the premiums are justified – even if they occasionally raise eyebrows. With existing assets attracting such premiums, some investors have turned their attention to development projects where there is more opportunity for upside.
Rising Niche Sectors
With COVID-19 being a virus, there is an ongoing need for vaccines, many of which require specialist cold storage facilities. Supply chain disruptions mentioned earlier have also highlighted the impact on national food security, with cold chain facilities playing a role in enhancing supply chain management. Demand for self-storage solutions is also on the rise, with many needing to free up space for home office setups and home-based learning.
Asia has led the world with the rise of data centre assets steadily becoming an investment. The digital age has driven the demand for data centres in tier-1 markets such as Tokyo, Hong Kong, Singapore, and Sydney, with increasing attention being paid to emerging markets such as India and China. Data centres are highly-specialized infrastructure assets; thus we commonly observe investors entering joint-venture arrangements with specialist operators to manage the risk exposure. The current trend is for the size and capacity of data centres to be increasing – mega data centres are very much on the rise – with forecasted demand stemming from continued corporate demand, planned government digital transformations and the advent of 5G.
It remains widely quoted that ESG is not quite the hot topic in Asia Pacific than it is in Europe. The global institutional investor community will drive the agenda, where some countries have yet to enact ESG disclosures that are broadly in line with global benchmarks such as GRI, SASB, the more recent TCFD and the EU’s SFDR. We see this presenting a real opportunity for members of the asset management community to take a lead on this topic and differentiate themselves.
2021 will hopefully deliver some much-needed economic recovery – with the pace and size of events influencing the real estate industry, H2 could also prove to be an exciting period in time for investors and asset managers.