Asian Investors Move up the Risk Curve and Look for Opportunities in European Markets in their Search for Returns
August 7, 2014
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Peter Walker, Urban Land Institute, London +44 20 7487 9586
HONG KONG (7 August 2014) Asian real estate investors are moving up the risk curve and looking at opportunities in European and U.S. markets in order to find better returns. These were some of the findings of the first ULI Asia Pacific Capital Markets Forum, a roundtable discussion between 30 real estate industry leaders, co-chaired by Joseph Azrack, Senior Adviser at Apollo Global Real Estate, and Richard Price, CEO Asia Pacific at CBRE Global Investors. The event took place in Hong Kong in late May 2014, as part of the ULI Asia Pacific Summit 2014.
The discussion noted that global commercial real estate transaction volumes had returned to pre-financial crisis highs for the first time in the fourth quarter of 2013, with activity in 2014 expected to grow some 10 to 15 percent from last year’s total of US$650 billion, according to recent data from Jones Lang LaSalle. However, approximately 50 percent of commercial real estate investment last year was undertaken in just 30 major cities around the world, with a particular emphasis on core properties in gateways such as London and New York. This fierce competition to deploy capital into prime assets in a relatively small number of cities has resulted in high pricing, with investors now turning to secondary markets and niche sectors in search of yield, a trend anticipated by ULI and PwC’s Emerging Trends in Real Estate Asia Pacific 2014 report.
Participants in the Capital Markets Forum noted that the past 18 months has not only seen a marked acceleration of capital moving out of Asia and into other markets, but that this current surge is likely to be just “the tip of the iceberg” compared with future volumes of investment. The resulting rise in investment is changing pricing levels in cities such as London and Paris in a way that is proving challenging for many domestic institutions to match. Participants believed investment levels were being driven by a general perception that assets in the West offered better risk-adjusted returns, as well as a newfound willingness among investors to move up the risk curve in search of yield once initial deals into trophy assets had been completed.
In addition, Asian investors who were once only willing to invest in major cities such as London or Paris are now diversifying into other markets, including Spain, Italy and central Europe. However, participants noted that markets such as Spain posed challenges for investors, with many believing that competition for opportunistic investments in distressed assets had driven prices up to levels that exceeded the country’s underlying economic fundamentals.
Within Asia, participants noted that despite ever-growing supplies of capital, transactions in the region declined by almost 15 percent year-on-year, according to Jones Lang LaSalle. Participants believed this was in part due to the sharp slowdown of activity in China as well as the growing perception that yields in prime markets had compressed to the point where investors were questioning whether the returns justified the market risk. However, participants did agree that the fundamental outlook for China, as well as Asia generally, remained strong with any short-term volatility offset over the longer-term by the wealth created of a growing urban middle class.
Participants noted the strong performance of Japan, with investment volumes in 2013 double those of the previous year, while commercial real estate transactions in the first quarter of 2014 ranked Tokyo the top city globally. This resurgence in the Japanese real estate market is a by-product of the economic stimulus plans introduced by the government and the continued access to cheap bank debt available to investors.
About the Urban Land Institute
The Urban Land Institute (www.uli.org) is a global nonprofit education and research institute supported by its members. Its mission is to provide leadership in the responsible use of land and in creating and sustaining thriving communities worldwide. Established in 1936, the Institute has more than 32,000 members worldwide representing all aspects of land use and development disciplines.