LaSalle sees good opportunities in niche Asia Pacific real estate sectors in 2014
February 13 2014 - Investors will need to look to niche and non-traditional real estate opportunities in Asia Pacific with less pricing competition, as traditional property investment sectors become crowded,according to LaSalle Investment Management (“LaSalle”), which today released the 20thedition of its Investment Strategy Annual, a comprehensive survey of, and outlook for, the global real estate markets over the next 12 months.
Property will remain an asset class in demand
Investors will need to look to niche and non-traditional real estate opportunities in Asia Pacific with less pricing competition, as traditional property investment sectors become crowded,according to LaSalle Investment Management (“LaSalle”), which today released the 20thedition of its Investment Strategy Annual, a comprehensive survey of, and outlook for, the global real estate markets over the next 12 months.
Paul Guest, Head of Research & Strategy, Asia Pacific, LaSalle Investment Management, says, “Property will remain an asset class in demand amongst traditional and non-traditional investors, who are currently broadly underweight to Asia. The prevalence of equity-rich Asian investors with a preference for core real estate will continue to push non-Asian investors to look up the risk curve in order to expand in the region. The long-term trends driving the appeal of bricks and mortar will continue and will take a long time to unwind.
“We expect continued growth in investment volumes and persistent upward pressure on pricing in many markets. The most aggressive competition will be for core/prime space, niche areas like luxury hotels, as well as development options like China logistics. In fact, with the amount of capital targeting Asian real estate, most of the traditional real estate asset categories are relatively crowded, increasing the appeal of select niche or contrarian strategies.”
Asia Pacific Economic Outlook
Although economic growth in Asia is slowing, the growth rate is built on a bigger, richer base and the region will continue to grow the fastest out of the world’s major economic regions, with an estimated average annual growth rate of 5.4% between 2013 and 2016 for the region.
Fundamentals are gradually strengthening across developed Asia, and markets like Singapore, Seoul and Hong Kong will all continue to benefit from China’s growth.
Slow Recovery of Fundamentals in 2014
The world’s largest economies, which include China and Japan, are expected to equal or exceed their lackluster growth in 2013. However, an ‘uncertainty tax’ will act as a drag on the global economy in 2014 and global growth rates will remain below the trend of the last two decades. Lingering fears of systemic risk and a tighter regulatory environment in financial markets are hindering many types of risk-taking. A more cautious approach to expansion and hiring by private corporations will also temper growth. Although large companies have much better access to credit markets, they are cautious about expanding. Smaller companies in many countries have much more difficulty accessing credit—these are often the smaller tenants in shopping centers and office buildings.
Equity and Debt will be Plentiful
Equity and debt will continue to be abundant for fully leased, modern assets in Hong Kong, Shanghai, Sydney, Singapore, and other financial centers. Secondary markets or deals with a lot of ‘moving parts’ will attract less capital, but more than in previous years. Contra-cyclical investors, or those willing to look beyond the current low interest rate/low growth environment, may identify some interesting opportunities.
Top investment opportunities
According to the Investment Strategy Annual, some of the top opportunities in Asia Pacific in 2014 will be in niche or non-traditional real estate sectors, where there will be less pricing competition, although there is likely to be more risk. Attractive potential strategies include:
- Development of student accommodation aimed at fast-growing international student populations in cities like Sydney, Melbourne, and Singapore. Successful models already exist in the US and the UK which can be adapted or, in Australia’s case, expanded. Unlevered returns could range from 12% to 15%.
- Branded and boutique hotel development in key tourism hubs, like Hong Kong, Singapore or Seoul, are also attractive as they cater to the expanding middle class seeking non-group travel. Unlevered returns of 12% to 15% are possible.
- Finally, in the core space serviced apartments targeting the inflow of expats in tier one cities in China as well as in Hong Kong. In both cases it is advisable to target refurbishment or asset upgrades, not outright construction, as expat housing allowances have been reduced. These tend to generate stable income flows and returns in the range of 4% to 6% in Hong Kong and slightly higher in China.
Other opportunities in Asia Pacific in 2014 include:
- Core: The income return generated by built-to-suit and/or prime warehouse facilities in Hong Kong, Singapore, and China make them amongst the most attractive long-hold options. Similarly, suburban retail in Japan and Singapore has compelling risk-adjusted returns. Japan is competitively priced as the sector is relatively capital-starved, however Singapore’s suburban market is tough to access as buildings rarely trade except as minority stakes in newer assets. Expect unlevered returns in the range of 3% to 8% in logistics, while suburban retail offers a tighter 5% to 7% return.
- Value-add: As the recovery gathers pace and core offices remain expensive, a variety of refit, refurbish or lease-up strategies for secondary or edge-of-CBD space have become attractive across the region. The tactics differ by market, from riding the upswing in core rents in Singapore; to leasing-up and selling into growing core demand in Japan; or repositioning secondary stock in Seoul, amongst others. This value-add strategy can generate returns of 9% to 14%.
- Opportunistic: Modern logistics infrastructure remains underdeveloped across much of the region. Japan’s industrial sector is becoming institutionalized, while China remains one of the least-well provided markets in terms of modern facilities. Both countries have abundant tenant demand for good space, although from a consolidation/cost-saving perspective in Japan as opposed to for expansion in China. Investors should see returns ranging from 12% to 15%. We also favour the provision of risk capital for residential construction in Sydney (12% to 15% return).
Mr Guest says, “The demand for core opportunities has not diminished throughout the past few years and it is only projected to grow as Asian pension, insurance and sovereign wealth funds expand their allocations to real estate. This is making core more expensive but for certain investors, the entry price is worthwhile given the quality of the income stream. This demand can also make value-add strategies attractive, by restoring quality income streams through active asset management.
“As a result, investors will increasingly seek additional returns by accepting additional risk, whether through leasing, leverage or location. This risk-taking should broaden provided there is no additional shock and stimulus rekindles growth as anticipated, allowing the momentum to build as economic and financial conditions improve.”
For twenty years, the Investment Strategy Annual has provided industry-leading research, insights and predictions of global real estate investment opportunities for LaSalle Investment Management clients and partners. To learn more about the 2014 Investment Strategy Annual, visit www.LaSalle.com/research.
About LaSalle Investment Management
LaSalle Investment Management, Inc. (together with its global investment advisory affiliates, “LaSalle”) is one of the world’s leading real estate investment managers. LaSalle on a global basis manages approximately $58 billion as of Q4 2017 of private and public equity and private debt investments. LaSalle’s diverse client base includes public and private pension funds, insurance companies, governments, corporations, endowments and private individuals from across the globe. LaSalle sponsors a complete range of investment vehicles including separate accounts, open- and closed-end funds, public securities and entity-level investments. LaSalle Investment Management, Inc. is a wholly-owned, operationally independent subsidiary of Jones Lang LaSalle Incorporated (NYSE: JLL), one of the world’s largest real estate companies. For more information please visit www.lasalle.com.
This information is based on the market analysis and expectations of LaSalle and should not be relied upon by the reader as research or investment advice regarding LaSalle funds or any issuer or security in particular. The information presented herein is for illustrative and educational purposes and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy in any jurisdiction where prohibited by law or where contrary to local law or regulation. Any such offer to invest, if made, will only be made by means of a private placement memorandum. Past performance is not indicative of future results.