Promising outlook for real estate in 2017 as capital continues to target Asia-Pacific

By Anthony Couse

/ JLL |

January 8, 2017 9:00 AM SGT

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There is no denying that 2016 was an eventful year, with Brexit and the surprising US presidential election result grabbing headlines around the globe. By comparison, the economic and political landscape in Asia-Pacific was rather more sedate. But as we look ahead to 2017, how will these ongoing global dynamics shape the economies of this region and, more specifically, the real estate sector?

Despite uncertainty, 2016 delivered high levels of activity, with new investors allocating capital to property in Asia-Pacific. With most economies in the region on a robust growth trajectory, real estate markets were resilient. Investors took the shock of last June’s Brexit vote in their stride and transaction volumes in this part of the world were similar to 2015. Based on our data, intra-regional capital flows trended slightly higher, but capital flows between the regions fell y-o-y, in part because investors preferred markets closer to home in times of uncertainty.

In 2016, several landmark deals were made: Qatar Investment Authority bought Singapore’s Asia Square Tower 1 for US$2.45 billion ($3.55 billion) in the largest single-tower deal in Asia-Pacific so far, signalling revitalised investor confidence in the city state’s office market. Elsewhere, other high-profile deals included Brookfield Asset Management’s acquisition of the International Finance Centre Seoul for US$2.7 billion and the sale of Century Link complex in Shanghai to insurance company China Life for U$2.96 billion.

Qatar Investment Authority bought Asia Square Tower 1 for US$2.45 billion in the largest single-tower deal in Asia-Pacific so far, signalling revitalised investor confidence in the city state’s office market

A review of the key markets

China continued to be a big story in 2016, overtaking the US to become the largest cross-border real estate investor and chalking up close to US$18 billion of investment in international commercial property assets in the first three quarters of the year.

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The Bank of Japan’s move to adopt negative interest rates subdued investment volumes in the country’s office sector as improved refinancing terms deterred owners from putting their assets on the market. But despite domestic and global economic headwinds, interest in Japan’s real estate sector was steady throughout the year, particularly in the hospitality sector.

Meanwhile in India, the government’s sudden withdrawal of IDR500 and IDR1,000 notes was a jolt to the property sector. However, the demonetisation is expected to have limited impact on office leasing and institutional investment, given the limited role of cash. In the long term, with India’s strong economic growth story, a more structured and transparent system would make the country more attractive to foreign investors.

Looking south, Australia continued 25 years of unbroken growth, proving its resilience through a transition from mining-sector wealth to more broad-based domestic economic drivers. Australian real estate continues to attract strong interest from overseas investors and has benefited from higher allocations by pension funds, sovereign wealth funds and insurance companies to real assets.

Looking ahead to 2017

In November, China announced that it would be more closely monitoring capital outflows. The introduction of such shifts in policy will certainly influence the size, scale and timings of outbound capital. While we expect few long-term structural changes, there will be some shortterm delays. But China’s appetite for overseas investment is unlikely to abate anytime soon and we expect it to retain its crown as the world’s No 1 real estate investor, thanks to its enormous capital base.

With the inauguration of President- elect Donald Trump in the US around the corner, many of us are pondering the likely impacts on Asia-Pacific. Certainly, there are question marks over the future of multinational trade deals that affect countries in this region, but in terms of the real estate market, we have yet to see significant effects.

Equally, we do not expect the recent interest rate hike by the US Federal Reserve to have a dramatic impact as investors have been factoring it into their decisions. The related currency volatility, however, will become an area of concern for cross-border investors and there is potential for the foreign exchange stock market to experience some judders owing to current geopolitical tensions. This may drive big, global investors to allocate more funds to property assets because of their safe-haven nature, relatively high returns and diversification benefits.

With this in mind, there is a strong indication that big-ticket transactions will continue in the coming months. The likelihood of most central banks’ keeping interest rates low for some time means that investors will continue pouring funds into real estate. This will help to stabilise yields in core asset classes while bolstering corporate occupational demand and rent performance. While there is a shortage of stock in the region — a challenge for investors — this presents significant opportunities for developers.

Source: Oxford Economics, November 2016

In search of new opportunities

While our clients remain positive about prospects for 2017, we are hearing from many of them that they are looking for value in off-market deals in secondary cities and looking at alternative sectors. Self-storage, for example, offers exposure to the growing number of consumers who live in compact homes and require separate storage space. Meanwhile, on the back of the rapid growth of e-commerce, the logistics sector is also gaining in popularity. An increase in demand for data centres, propelled by the adoption of cloud computing and big data, means that canny investors are considering that too.

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In terms of geography, Southeast Asia is gaining momentum. In particular, Vietnam’s real estate sector saw a 12% y-o-y increase in investment and with ongoing improvements to market transparency and a projected GDP growth of about 6%, it is an increasingly attractive destination. Meanwhile, a mature market such as Singapore remains appealing, thanks to its strong fundamentals and current competitive entry point.

Overall, Asia-Pacific is well placed to outperform other regions in 2017 and we are confident about the longterm strength of its real estate sector. Though there may be challenging times ahead with potential political and financial market instability, we look ahead to a year of new possibilities, though hopefully fewer surprises.

Source: JLL Research, 3Q2016

Anthony Couse is CEO for Asia-Pacific, JLL

This article appeared in The Edge Property Pullout, Issue 761 (Jan 9, 2017) of The Edge Singapore.

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