Emerging Trends
in Real Estate®

Asia Pacific 2019

Emerging Trends in Real Estate®
Asia Pacific 2019

A publication from:

Contents
1

Executive Summary

3
4
7
7
9
10
11
11
13
14
14
15
17
17
18
18
19
21
22

Notice to Readers
Chapter 1: Calling the Top?
China: Key Themes
Big Money Chases Slow GrowthWill Cap Rates Reverse?
Strategies Evolve
Japan: Key Themes
Value-Add Ticks the Boxes
Build-to-Core Strategy Aims at Institutions
Return of Distress?
Emerging Markets Still a Draw
Niche Sectors Still in DemandWorker Housing Cuts Commutes
Government Policies Boost Affordable Housing
Co-living – Template for the Future?
Multifamily – Slow but SteadyAustralia: Key Themes
Coworking Questions Remain
Rate Hikes Loom

23
25
25
26
27
27
28
30
31
33
33
34
35

Chapter 2: Real Estate Capital Flows
Japan’s Great Wave
China’s Tide Retreats
Singapore and Hong Kong Take Up the SlackSouth Koreans Turn to Europe and Debt
U.S. Investors Up the Pace of Asian Investment
Fundraising
Banks Becoming More Cautious
New Lenders Still Emerging
Debt Opportunities in China
Stress and DistressBonds Lag as Beijing Tightens Liquidity
REITs

38
41
51

Chapter 3: Markets and Sectors to Watch
Top Investment Cities
Property Types in Perspective

56

Interviewees

Emerging Trends in Real Estate® Asia Pacific 2019i

Editorial Leadership Team
Emerging Trends in Real Estate®
Asia Pacific 2019 Chairs

PwC Advisors and Researchers

K.K. So, PwC

Australia
Andrew Cloke
Bianca Buckman
Iain Boot
James Dunning
James McKenzie
Jane Reilly
Joseph Carrozzi
Josh Cardwell
Kirsten Arblaster
Kristen Stubbins
Morgan Hart
Scott Hadfield
Shannon Davis
Sue Horlin
Tony Massaro

John Fitzgerald, Urban Land InstitutePrincipal Authors
Alex Frew McMillan, Urban Land Institute Consultant
Mark Cooper, Urban Land Institute Consultant
Contributing Editor
Colin Galloway, Urban Land InstituteContributing Researchers
Michael Owen, Urban Land InstitutePauline Oh, Urban Land InstituteYusnita Baharuddin, Urban Land Institute
Tanya Lee, Urban Land InstituteULI Editorial and Production Staff
James A. Mulligan, Senior Editor
David James Rose, Managing Editor/Manuscript Editor
May Chow, Senior Vice President, Marketing &Communications, Asia Pacific

China
Gang Chen
Hong Kong
K.K. SoPaul Walters
India
Anish Sanghvi
Bhairav Dalal
Dhiren Thakkar
Tanya Tandon

Emerging Trends in Real Estate® is a trademark of PwC and is registeredin the United States and other countries. All rights reserved.
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© November 2018 by PwC and the Urban Land Institute.
Printed in Hong Kong. All rights reserved. No part of this book may be
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Recommended bibliographic listing:
PwC and the Urban Land Institute: Emerging Trends in Real Estate® Asia
Pacific 2019. Washington, D.C.: PwC and the Urban Land Institute, 2018.
ISBN: 978-0-87420-420-9ii

Emerging Trends in Real Estate® Asia Pacific 2019

Indonesia
Brian ArnoldDavid Wake
Margie Margaret
Japan
Akemi Kitou
Eishin Funahashi
Hideo Ohta
Hiroshi Takagi
Koichiro Hirayama
Raymond Kahn
Soichiro Seriguchi
Takashi Yabutani
Takehisa Hidai
Takeshi Nagashima
Luxembourg
Carolin Forster
Kees Hage
Robert Castelein
Philippines
Malou Lim
Singapore
Chee Keong Yeow
Magdelene Chua
Maan Huey Lim

Executive Summary

After nine years of relentless expansion, Asia’s real estate markets are facing rising
headwinds. An impending trade war, rising interest rates, tighter access to credit, andbuyer fatigue at sky-high prices for both commercial and residential properties are
causing investors to question whether the long bull cycle may be reaching its peak: “Themarket’s wobbling like a jelly on a plate,” as one investor put it. “We’re at historic highs
across the board.”That said, market fundamentals in 2018 remain robust. Transactions for the year are atrecord levels and pricing is strong, sustained by ever-growing volumes of institutional
capital piling up in Asia’s biggest economies.
For now, then, the music continues, and although some investors are looking to sell down
their holdings and reposition, the sheer weight of capital looking to find a home in realestate means that prices may not fall significantly even if other indicators turn south.
As a result, and as in previous years, investors must consider more varied strategies thanin the past to get money into the market.
Survey Responses by Country/Territory

25

24.7%

Percentage of responses

20
17.9%

17.0%

15
14.0%
10
9.5%

5.9%

5

0

Singapore

Australia Hong Kong

India

Japan

Philippines

5.2%

China

6.0%

Others*

Source: Emerging Trends in Real Estate Asia Pacific 2019 survey.
*Includes Germany, Indonesia, Malaysia, South Korea, Taiwan, Thailand, United Arab Emirates, United
Kingdom, United States, and Vietnam.

1

Emerging Trends in Real Estate® Asia Pacific 2019In the current environment, developed
markets have the broadest appeal.
Australia, therefore, remains the mostpopular choice, in part because thefundamentals remain sound—relatively
high yields and good prospects for rental
increases. In addition, the country’s deepand liquid markets offer a port in a storm.
Japan has many of the same features.

Survey Responses by Geographic Scope of Firm

Other focus
2%

Pan-Asia focus

25%

But with competition for assets in gateway
cities meaning they are now out of reachof increasing numbers of investors, there ismore readiness to look further afield.
That means, for a start, that emerging
markets such as Vietnam and India
continue to attract attention. And riskier
strategies are again go-to bets, withvalue-add and “develop-to-core” both
popular approaches. The latter normallyrequires greater attention to the land plot,
construction quality, and partner thansimply location. Higher-yielding plays suchas logistics and data centres also fit the bill.
This greater taste for risk is reflected in thehigher returns that investors are targeting
this year. More than half (53 per cent) of
those surveyed are targeting annualised
gains of 10 per cent and above by theend of 2019. Last year, only two in fiveinvestors (41 per cent) had the same highreturns in mind.
At the same time, some investors are
considering how markets would look in
the event of a downturn. Most obviously,
this implies more distress, which has
been thin on the ground in recent years.
Already, some distress opportunities
have appeared in markets including India,
China, Indonesia, and even Japan. In
addition, transaction volumes would drop,

Global focus

46%

Focused primarily on
one country/territory

26%

Source: Emerging Trends in Real Estate Asia Pacific 2019 survey.

although prices may not fall much given
the huge amounts of liquidity currently incirculation. A correction would also mean
more expensive debt as well as restricted
access to debt, together with a flight-tosafety mentality that would tend to support
mature markets, as noted above. Finally,
there would be a likely reversal of capital
flows in emerging markets.
Otherwise, several modern-day concepts
are gaining traction. Over the last few
years, coworking and shared workspaces
have taken off in Asia, lending a tech edge
to the stodgy serviced-office sector andpromising better returns for landlords.
Doubts remain about the viability of current
operating models, however.
Co-living, on the other hand, has obvious
appeal in Asia’s ultra-high-cost residential
environment. Asia’s gateway cities are

perfect Petri dishes to explore how coliving works in an Asian context, althoughtenants in co-living complexes are notalways focused on cost-saving.
In terms of capital flows, meanwhile, theongoing buildup of liquidity across Asia
continues to see huge amounts of money
being sent cross-border to be invested
in foreign real estate assets, despite atightening of the regulatory crackdown in
China that has resulted in steep declines
in outgoing flows in 2018. Other capital, inparticular from Singapore and the UnitedStates, has stepped up in its place. Strong
outgoing flows in Asia seem certain tocontinue given in particular huge newreserves of capital from Japan that are
expected to join the mix in 2019.
Bank debt remains readily available forreal estate investors in most markets,

Emerging Trends in Real Estate® Asia Pacific 20192

although impending interest rate hikes andtightening lending terms are expected torestrict access going forward. As a result,more debt funds are being formed, inparticular looking at opportunities in China
and Australia. Mezzanine debt returns
more than bank finance and is also seen
as safer than buying actual real estate—animportant safety net if markets correct.

sovereign bonds. Singapore REITs slightly
underperformed other large regional REIT
centres. Amongst emerging markets,
India finally looks set to kick-start its
domestic REIT industry with the launchof a large portfolio of business properties
early in 2019, more than four years sinceregulators introduced domestic REIT
legislation.

REIT markets have turned in a fairly
stagnant performance in 2018—an
unsurprising consequence of the upward
trajectory in global interest rates ascapital transitions to higher-yielding

Finally, this year’s investment prospectrankings reflect the enduring appeal of
the slow-but-steady returns offered by
gateway cities in developed markets, with
Melbourne, Sydney, Tokyo, and Osaka to

the fore. All these cities offer relatively highreturns relative to local interest rates andsovereign bonds. Singapore continues tobenefit after its rebound from last year’slows, while Shanghai and Shenzhenalso put in respectable performancesconsidering especially government moves
to restrict availability of debt capital todevelopers.

Notice to Readers
Emerging Trends in Real Estate® Asia Pacific is a trends and forecast publication now in its 13th edition, and is one of the mosthighly regarded and widely read forecast reports in the real estate industry. Emerging Trends in Real Estate® Asia Pacific 2019,
undertaken jointly by PwC and the Urban Land Institute, provides an outlook on real estate investment and development trends,
real estate finance and capital markets, property sectors, metropolitan areas, and other real estate issues throughout the Asia
Pacific region.
Emerging Trends in Real Estate® Asia Pacific 2019 reflects the views of individuals who completed surveys or were interviewed
as a part of the research process for this report. The views expressed herein, including all comments appearing in quotes, areobtained exclusively from these surveys and interviews and do not express the opinions of either PwC or ULI. Interviewees
and survey participants represent a wide range of industry experts, including investors, fund managers, developers, property
companies, lenders, brokers, advisers, and consultants. ULI and PwC researchers personally interviewed 89 individuals and survey
responses were received from 373 individuals, whose company affiliations are broken down below.
Private property owner or developer
24%
Real estate service firm (e.g., consulting, financial, legal, or property advisory)
24%
Fund/investment manager
22%
Homebuilder or residential developer
10%
Institutional equity investor		 6%Bank lender or securitised lender		 3%Other entities
11%
Throughout the publication, the views of interviewees and/or survey respondents have been presented as direct quotations from theparticipant without attribution to any particular participant. A list of the interview participants in this year’s study who chose to be identified
appears at the end of this report, but it should be noted that all interviewees are given the option to remain anonymous regarding their
participation. In several cases, quotes contained herein were obtained from interviewees who are not listed. Readers are cautioned not toattempt to attribute any quote to a specific individual or company.
To all who helped, the Urban Land Institute and PwC extend sincere thanks for sharing valuable time and expertise. Without the
involvement of these many individuals, this report would not have been possible.

3

Emerging Trends in Real Estate® Asia Pacific 2019

Chapter 1: Calling the Top?
“Both in terms of rent and capital values around the region, we’re near the
top of the cycle.”
Barring an errant 18-month spell throughthe end of 2016, cross-border transaction
volumes in Asia have known only one
direction since the financial crisis: up.
Central banks ensured money was easy, if
not quite free, and property markets joined
equity markets in climbing to new highs.
Over the last year, though, real estate
investors in Asia have begun to think again.
Across the region, upwardly spiralling
prices, compressed cap rates, andominous macro and geopolitical indicators
have fund managers and asset owners
wondering whether the markets have finallypeaked, and if so, how they should react.
To be certain, the same question has beennagging investors in Asia for years—but
this time, alarm bells are ringing louder thanever.
Despite a few pockets of weakness, realestate fundamentals in Asia have yet toshow significant signs of decline. In fact,buoyed by a number of big-ticket deals,commercial transaction volumes reached
an all-time high on a rolling 12-month
basis in the first half of 2018, according toanalysts Real Capital Analytics (RCA).

Exhibit 1-1 Asia Pacific Investment by Source of Capital

Domestic

Cross-border within APAC

Cross-border from outside APAC

% Cross-border

200

40%

180

35%

Volume (US$ billion)

160

30%

140
120

25%

100

20%

80

15%

60

10%

40

5%

20
0

'12

'13

'14

'15

'16

'17

'18

0%

Year-over-year change

20%

10%

0%

–10%

–20%
'13

'14

'15

'16

'17

'18

Source: Real Capital Analytics.

Emerging Trends in Real Estate® Asia Pacific 20194

Chapter 1: Calling the Top?

In Hong Kong, huge sums paid in acouple of flagship deals involving Mainland
Chinese investors propelled the city to the
top of the charts (second worldwide only to
the New York City metro area), despite its
reputation as a market where stock rarely
trades.
Otherwise, spending by domestic
institutions saw both Tokyo and Seoul also
registering high volumes, with deal flowin the latter up 66 per cent over the same
period in 2017. Sydney, Shanghai, andMelbourne were the other Asian markets
among the global top 30, rounding out
a shopping list of gateway cities for core
investors in search of Asian assets.

Perhaps unsurprisingly, those markets also dominate our survey findings of the most
attractive markets for regional investment and development (see chapter 3). Cap rates,
meanwhile, have continued to compress, especially in Australia and South Korea.
But while neither transaction statistics nor the profitability forecast in our 2019 survey(see page 10) betray particular signs of weakness, interviewees across Asia voiced aconsistently negative theme that markets were at or near a cyclical peak, with someinvestors who don’t have to stay invested indicating they were looking to sell properties
into the current strength.
In Hong Kong, one opportunistic investor commented that “The market’s wobbling likea jelly on a plate at the moment. Nothing is making us collapse or melt, but nothing ismaking us rise, but it’s hard to see where the markets are going to go from here—we’reat historic highs across the board.”

Exhibit 1-2 Property Cycle—Percentage of Respondents
Perceiving Market Conditions to Be in Various Stages of the Cycle
Peak

UpturnBottom

Downturn

Tokyo 95

5

Auckland 61

17

Sydney 58

37
6

16

Singapore 38

32

38

Brisbane 33

6

19

11

Bangalore 13

55
63

Beijing 13

13

13

50

Mumbai 6

38

57

Guangzhou

25

13

63

Perth

38

55

Shanghai

45

36

Kuala Lumpur 17

0

64
23

Jakarta 13

Emerging Trends in Real Estate® Asia Pacific 201929

6

Hong Kong 46

5

19

13

Melbourne 56

Source: RICS.

4

60

25
10

20

63
30

40

50

60

70

80

90

100

In Sydney, a residential developer said:“With U.S. 10-year bond [yields] rising,
you’d have to say we’re at the top of thecycle, so cap rates are only going to go
one way—out—in most people’s opinion.
Someone said to me the other day that if
you look at the real estate cycle as a clock,the prime commercial market seems to be
stuck at 11:30.”
And in Japan—a perennial favourite forcore investors—one foreign fund manager
observed: “I do think Japan is definitely
coming in for a correction. When yields
are down so much that you start to seevery small regional banks coming to Tokyo
to try to finance real estate directly as

opposed to being part of a syndicate forone of the megabanks, to me that means
you’re nearing the top, and something has
to give.”

In many ways, the lack of a cataclysmic
event marking an end to the current longbull market would probably be seen as
healthy, indicating a return to a normal
cyclical dynamic with consequences morepredictable (and probably less severe) thanthose of a black swan. In any event, morethan a few investors seemed to welcome
the return of the bear, where deals would
proliferate and probably pay more thanthey do currently. As one fund manager put
it: “I wake up every morning saying, ‘Please
let there be stress,’ which is a nice way ofsaying we need to get some distress backin the market.”As a result, investors are looking over theirshoulders for some event that might sparka downward move. In previous years, theconsensus was for a “black swan”—someunknown unknown—to be the catalyst,
as happened in 2008. This time, though,some mundane event seems a more likely
cause—rising interest rates, falling bondor stock prices, fallout from trade wars,
or simply investor fatigue at waiting for aturning point to arrive.

Exhibit 1-3 Sales Volumes for Most Active Global Real Estate Markets, First Half of 2018
2017
Rank

H1 2018
Rank

1
7
3
2
5
6
9
4
13
8
21
12
26
24
11
19
18
14
20
25
28
31
17
10
22
30
15
34
32
35

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30

Market
NYC Metro
Hong Kong
London MetroLA Metro
SF Metro
DC Metro
Tokyo
Paris
ChicagoDallasSeoul
Atlanta
Phoenix
SeattleAmsterdam/Randstad
Miami/South Florida
HoustonBoston Metro
SydneyDenverTorontoMunichRhine-Ruhr
ShanghaiFrankfurt/Rhine-Main
Philly Metro
Berlin-Brandenburg
AustinMelbourne
San Diego

Sales Volume (US$ million)

Year-over-year Change$26,034$19,681$17,476$15,86789%
7%
4%$11,188$10,663$9,276$8,479$8,182

-7%
24%
11%
19%
42%

$8,012$7,785$6,233

-12%
66%
-8%
59%

$5,984$5,722$5,662$5,208$4,915$4,621$4,346$4,226$3,944$3,775

23%

27%
-6%
-21%
-9%
-45%
-2%
9%
32%
18%

$3,706$3,687-37%-48%$3,499$3,227$2,920$2,891$2,852$2,769

-32%
17%
-51%
-27%
50%
21%

Note: Includes office, industrial, retail, apartment, hotel, senior housing, and elderly care real estate.
Source: Real Capital Analytics.

Emerging Trends in Real Estate® Asia Pacific 20196

Chapter 1: Calling the Top?

China: Key Themes

forcing many developers onto the sidelines.
“Government pricing is now just too high,”
one investor said. “The basis doesn’twork.” Starved of capital, developers now
also have less money to replenish landbanks.

or located in a less fashionable area usedas spillover for back-office purposes.
Then international expertise provides
global property standards and financial
management, while the local partner
contains labour and operating costs.

Increasingly, therefore, land at auction
often goes unsold, previously a key sourceof revenue for many local governments.
That is causing some authorities to resort
to drastic action. “There are signs thatgovernment auctions are now coercing
companies to make bids, because
companies are not wanting to do that,”
As usual, government policy mandates have the family office head said.
been enforced by imposing limitations on
credit for both developers and retail buyers. Opportunistic Entry
As a result, according to the head of afamily office that invests exclusively in China: Opportunistic investors may look for otherways of purchasing land. One special“We are seeing residential prices softening
situations investor is targeting stabilised
significantly.” The impact of the measures
returns of 13 per cent in China. “We areis being felt in other parts of the industry
very focused on developing something
too. Whether residential, commercial, orthat is better than the tenant is expecting
industrial, “the clampdown on government
at a lower cost than they expected,” thecredit to real estate companies isinvestor said. That is achieved by working
happening.”with local partners to drive secondarymarket plot prices as low as possible,
Adding to these problems, land in major
perhaps because the seller is distressed,
cities has become prohibitively expensive,

The flood of institutional capital that has
built up in China at least provides an exit
for investors willing to take development
risk. “Build to core” is the play. “In allof our markets, there’s a shortage of
quality yielding institutional assets for local
institutional investor as well as foreign
investors,” the investor said. That provides
the exit for development or value-add
projects. As a result, “we are looking tocreate institutional-quality assets to sell
into that market.”

Big Money Chases Slow Growth

For European or North American
institutions such as pension funds andinsurance companies, Asian assets offer
better returns than they can earn at home.
In particular, if they are comparing theexcess return from prevailing rental rates
over the local cost of borrowing, markets inJapan and Australia are attractive options.

With GDP growth in China ticking down to
its lowest rate since the global financial
crisis and senior officials making
uncompromising statements about theneed to curbing further home price rises,
Mainland markets end 2018 in subdued
mood and a sense that change is in the air.
“In China right now, the macro view is thatthe way most private-equity investors havemade money in the past is not how they’regoing to make money in the future,” onespecial-situations investor said.

Fears of an impending cyclical reversal
come as liquidity in the market reaches
an all-time high, with capital from some of
the world’s largest institutional investors—
mostly based in Asia—continuing to pourinto regional property assets as investors
seek to boost income beyond what
regional or global bond markets can offer.
Having resisted real estate investment in
the past as an illiquid and alternative asset
class, they now increasingly view it as amainstream portion of their portfolios.
As a result, allocations to property that in
the past were considered aggressive at 5per cent to 8 per cent of assets are now derigueur, with some investment managers
reporting that the biggest institutions

7

are pushing that figure well north of 10
per cent. “There are trillions of dollars
lined up wanting to get invested in realestate, massive amounts of capital,” oneopportunistic investor said. So “there’s a
lot of money pushing the market up, but
not great expectations of [rental] growth.”
With so much capital now in play, thesearch for core investments in Asia is
tougher than at any point since the global
financial crisis. According to one core
investor: “Obviously, the pricing is where it
is—it has made our lives more difficult, andrequires a lot of work to get one investment
done vis-à-vis what it was five years ago.
But as an insurance company, we are alonger-term investor with certain uniquefeatures and the ability to hold things longterm.”

Emerging Trends in Real Estate® Asia Pacific 2019

Returns in the low teens are attainable foropportunistic plays in China, particularly
for value-add projects with a hands-on
approach and a strong local partner.
The choice of product and partner is the
key determinant of profit margins, rather
than the choice of market. “I don’t see a
massive differential these days between
Shanghai, Beijing, Shenzhen, Guangzhou,

Institutional buyers enjoy a number ofcompetitive advantages over privateequity players. In particular, investment
yields are not necessarily seen as the main
consideration, allowing the big funds tolook to other factors, including long-term
capital appreciation, diversification ofassets, and provision of a safe haven in theevent of a global economic downturn.

Chongqing, Wuhan—they’re all monstrous
multimillion-square-foot markets,” one panAsia opportunistic investor said. “There’s
a lot of business in all of them, and I don’t
think you’d really worry too much about
being in one place or the other.”Competition is fierce, though, particularly
as the clampdown on overseas property
purchases “means there’s more money inChina trying to get itself invested. And often
they’re less-sophisticated investors witha different perception of risk,” the investor
said, “so you’ve got to be very aggressive
and very quick to get in as a foreigner tobuy.”
Beijing’s drive to reform China’s bloatedstate-owned enterprises (SOEs) may
indirectly provide support to real estate
investors. Pushed to become more
efficient, SOEs are offloading noncore
portions of their businesses, which may nolonger fit with the parent’s core operations.

Exhibit 1-4 Office Sector: Projected Total Annual Return, 2018–2022
10-year bond yield

Excess return

Shanghai – Pudong

4.1%

3.1%

Osaka

0.1%

7%

Sydney – CBD

2.8%

4.2%

Fukuoka

0.1%

6.5%

Shanghai – Puxi

4.1%

2.5%

Nagoya0.1%

Beijing – overall

4.1%

2.1%

Melbourne – CBD

2.9%

3.3%

Auckland – CBD

3.1%

Seoul – CBD

2.7%

2.7%

Yokohama

0.1%

5.3%

Singapore – Marina Bay

2.6%

2.7%

Singapore – Shenton Way

2.6%

2.6%

Kuala Lumpur

4.5%

0.7%

Guangzhou

4.1%

0.9%

Singapore – Raffles Place

2.7%

2.2%

Brisbane – CBD

2.8%

Adelaide – CBD

2.8%

1.5%

Tokyo

0.1%

4.2%

Perth – CBD

2.9%

Big developers are therefore sometimes
spinning off smaller parts of their businessthat have experience as niche operators,
providing opportunity for overseas
investors to provide capital and operational
expertise. Through restructuring, “you’ve
got groups that are not natural owners ofthese assets looking to sell,” the specialsituations investor noted. “In the past, bigdevelopers weren’t interested because it
was too small an opportunity.”

In addition, because pension funds andinsurers can operate with little or noleverage, rising interest rates are less of arisk, nor are they subject to the limited lifespans of private-equity funds, allowing them
to “play it through cycles,” as an investor ata large insurance company put it.
Asian institutions investing in their domestic
markets enjoy further advantages. They
are, of course, more familiar with local
conditions. In addition, they are exempt froma range of factors such as currency-hedging
costs, foreign-exchange restrictions, fees
and charges aimed at overseas entities,
as well as the expense of moving money
internationally. As a result, “it’s very difficult
to compete with local capital for coreassets,” the investor said. “Almost bydefinition, if you’re layering in the cost of tax
and currency hedging, your cost of capitalis going to be higher than the domestic
competition for the same assets.”

6.3%

2.9%

1.7%

0.7%

Hong Kong – overall -0.4% 2.5%
Hong Kong – Central -0.6% 2.5%
–1

0

1

2

3

4

5

6

7

Note: Projected compound annual return. Excess return equals rate of total income plus capital
appreciation over the local 10-year sovereign bond rate.
Source: DWS, as of July 2018.

Emerging Trends in Real Estate® Asia Pacific 20198

Chapter 1: Calling the Top?

Will Cap Rates Reverse?

Exhibit 1-5 Most Problematic Issues for Real Estate Investors

The glut of institutionally held core capital
circulating in regional gateways is now
forcing more yield-sensitive investors totravel ever further afield in search of deals.
This means not only that assets are harderthan ever to find, but also that cap rates
continue to be prohibitively tight.
The one difference this year, however,is that—with the possible exception ofAustralia—there is a growing consensus
that yield compression may finally havereached its limit. As one investor said:“We still have more money chasing assets
than assets available, which is why cap
rates—which in my view should havebeen moving out some time ago—are still
stubbornly low. But I wouldn’t say they’recompressing anymore. They probably were
six months ago, but I think now—though
I say this every year—cap rates havebottomed out.”
This is not to say, however, that cap-ratecompression is about to reverse anytime
soon. Rising interest rates in the UnitedStates are starting to filter through to the
Asia Pacific region, which means logicallythat cap rates there should begin to moveout too—partly because investors’ costof capital is higher and partly because
alternative investment types (such as
bonds) thereby become more appealing.
Still, as the investor pointed out: “You haveto wonder whether the capital markets’
supply-and-demand equation will permit
cap rates to rise, because if you wantto buy a building, you have to make theowner an offer he can’t refuse that isalways better than the next man’s, andthere are plenty of next men in the markets.
My bet is that any change is going to bepretty slow. You might see a different
reaction in the residential sector because
it’s sentiment driven, but the commercial
markets will be very much dependent on

9

Low yields

6.10

Lack of investable properties

5.81

Possible trade wars

5.50

Competition from Asian buyers

5.40

Impending interest rate hikes

5.33

Currency volatility

5.16

Competition from global buyers

5.03

Global economic growth

4.91

Cost of finance

4.89

Asian economic growth

4.82

1
2
Least
problematic

3

4

5
Neutral

6

7

8

9
Most
problematic

Source: Emerging Trends in Real Estate Asia Pacific 2019 survey.

whether buyers will keep buying at theselevels. And I think they will, because a lotof these private-equity funds have to—you
don’t get paid for keeping cash in thebank.”
One factor that may make a difference
around the margins is slowing activity by
Chinese investors, as regulatory restrictions
on capital moving out of China tighten
further. In some locations (in particular
Australia and Hong Kong), this has caused
something of a vacuum because Chinese
buyers have been generally more willingto push the envelope in terms of pricing,
especially at the top end of the market.
Japanese insurers and pension funds
are now beginning to step into that void,
but they are still early and small in their
allocations.

Emerging Trends in Real Estate® Asia Pacific 2019

“We still have more money
chasing assets than assets
available, which is why cap
rates—which in my view shouldhave been moving out sometime ago—are still stubbornly
low. But I wouldn’t say they’recompressing anymore. They
probably were six months ago,
but I think now—though I say
this every year—cap rates havebottomed out.”

Strategies Evolve
Ongoing competition among investors toplace capital is in turn continuing to shape
how investors approach the sourcing ofassets. As a result, buyers today are more
likely to be very site-specific, working fromthe ground up rather than the top down.
One European institutional investor said
that his company still starts with a macro
viewpoint and an analysis of “megatrends”
such as the emergence of Asia’s middle
class and the rapid digitisation of theregion. Increasingly, however, it is having
to drill down to specific cities, and thensubsectors of cities to find deals—theindividual asset, based on issues suchas land-acquisition prices, construction
quality, and market segmentation—that
makes much more difference than the topdown view: “There’s a lot more figuring out
of investments as opposed to in the past
where we used a broad brush, and said‘Let’s invest in office in Tokyo, done.’ ”
If core prices are now too high for many
investors to buy, what are the alternatives?
For some—and probably increasingly
so—the answer is nothing at all. Many
funds are now sitting on growing reservesof unused capital, hoping for a reversal in
the market to offer up buying opportunities.
For those with a more opportunistic
mandate, however, or who are duty-boundto deploy capital, the obvious option is tomigrate to riskier strategies and markets.
More investors now have little choice but
to go down this road in order to deploy
capital. As a result, and although yieldcompression inevitably means that buyers
today must assume more risk for a given
return, our survey still suggests a skew
higher in return expectations. Some 21 percent of investors now target returns of 15
to 20 per cent in the 2019 survey, up from
17 per cent in 2018 (see exhibit 1-6).

Exhibit 1-6 Investors’ Targeted Returns between End of 2017 andEnd of 2018
Over 20%0%–5%
9%

15%–20%

6%

17%
34%

10%–15%

5%–10%

34%

Investors’ Targeted Returns between Now and End of 2019
Over 20%0%–5%
9%

15%–20%

7%

21%
31%

10%–15%

5%–10%

32%

Source: Emerging Trends in Real Estate Asia Pacific 2019 survey.

Exhibit 1-7 Real Estate Firm Profitability Trends

Excellent

Good

Fair

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Source: Emerging Trends in Real Estate surveys.

Emerging Trends in Real Estate® Asia Pacific 201910

Chapter 1: Calling the Top?

Japan: Key Themes
Perhaps surprisingly, Japanese cities havemigrated upward in this year’s investment
prospect rankings to near the top of thetable, following a couple of years wheninvestors questioned whether local markets
had run out of steam. Their resurgence islikely a reflection of the fact that Tokyo inparticular is one of the few destinations in
the Asia Pacific region where institutional
investors can find a deep and liquid pool ofassets to trade.
Tokyo promises stabilised, high-quality
office assets that have delivered betterthan-expected returns in the last coupleof years. “We expected flat-ish rents over2017 and ’18, but have been surprised by
3 per cent to 7 per cent [increases],” theAsia CEO of one European developer said.
Yields have generally fallen around one
percentage point over the last five years,
due to strong capital value growth. Still,
many of the best buildings in the Japanese
capital are closely held by Japanese
corporations, or trade between thedeveloper and its sponsored REIT. Even
the buildings that change hands often doso behind closed doors, without coming

to any market that a foreign investor canbreach.
One unique aspect of the Japanese market
is that returns can be outsized due tothe low cost of borrowing (i.e., sub–1 percent), access to relatively high amounts ofleverage, and the availability of seven- to
10-year fixed-rate financing, which basically
locks in a minimum level of return from theoutset. In the Asia Pacific region, only Hong
Kong promises lower annual total returns
on office property than Tokyo, according to
DWS. But with the risk-free (i.e., Japanese
government bond) rate at only 0.1 per cent,Tokyo’s annual 3 per cent cap rate offersa handsome yield spread over both cost ofcapital and the local sovereign. That said,
investors are reporting that borrowing rates
may be set to inch up, and in practicalterms may indeed already have done sogiven new bank policies imposing upfront
fees on lending.
Last year saw investor focus turn awayfrom office and towards to the residential
market, which offered slightly higher yields
together with lower volatility. Yields have
now compressed drastically, however, anddespite a revival in Japanese wage growthproviding a slight lift to rents, investor
interest in residential has waned as the
supply of suitable properties dries up.
According to one investor active in the
sector: “I think part of it is that lenders areconcerned about pricing. They’re saying,‘Do we want to do something below a 3
cap?’ I’ve always thought the 3 per centlevel was going to be a hurdle in Tokyo.
People were suggesting it could go to a 2,
but once it does, when you start to look atthat price per square metre on the building,it’s higher than you’re selling individual
condos for—obviously that doesn’t support
your strategy for making money.”
As a result, some investors are now
rotating into B-grade office. According
to one fund manager: “If you’re looking
at B-grade and below-market rents, I
think that’s still a good play. Probably still
defensive for all intents and purposes, but
I’m more comfortable with tenants who
pay 20,000 yen or less per tsubo because
I can raise their rents a bit and still makeit work for me, and I can also find tenants
to take that space even in a downturn. In

Value-Add Ticks the Boxes
Although there are many ways for investors to assume more risk, the most popular
today is perhaps the ongoing shift toward value-add noted in last year’s report, focusing
especially on providing more flexibility, better user experience, and improvements throughbetter design and technology—whatever it takes to drive income growth from theproperty.
A large, shiny office space may have shophouses nearby that would attract techentrepreneurs, given the right overhaul. Old police stations can become retail and arts
venues. Shopping centres down on their luck can regain a relevant position by adding
courier-pickup operations, coworking space, and gyms.
On one level, this strategy is an obvious response to the lack of core product, as well as
unprecedentedly high prices. At the same time, squeezing extra efficiency from buildingsin Asia is an obvious play given that:

11

Emerging Trends in Real Estate® Asia Pacific 2019

So many have inherent inefficiencies—
from physical shortcomings, tenant mix,
or business use issues—that might be
addressed.
Long-term structural shifts in theeconomy and in demographics arechanging the ways that work, living,
and retail spaces are being used,creating new opportunities to reposition
assets.
There is a multitude of buildings in
Asian cities now past their prime.
Asset enhancement therefore fits wellwith an overarching theme of urban
regeneration that continues to gain
momentum across the region.

Tokyo, that stuff is trading high-3s/low-4s
basically.”
Those focused on higher yields continue
to look to secondary cities, though evenhere yields are being squeezed. According
to one locally based fund manager:“Osaka basically has become overheated,particularly for residential, which is below a
4-cap now. We’re not players at that level,
but for office you’re seeing cap rates at
4.5-ish, which is one of the reasons it still
makes sense—Osaka office is probably a
good story still because rents are relatively
low.”
Prices in Nagoya and Fukuoka, meanwhile,“have gone up and don’t make sense tous,” the fund manager added. “So my viewfor the non-Tokyo markets is that you justStill, it is important not to see value-add
as a panacea. Investors must pick andchoose the right asset, and an intimate
knowledge of local markets is often needed
to understand whether it can succeed.

have to be cautious; it has to be driven
by location and quality. But the differencecompared to 10 years ago is liquidity.
Those markets have developed their own
characteristics. All of them have their own
economic base, so the liquidity will remain,which was the biggest issue before. When
there was a correction they suffered fromliquidity issues, but I don’t think that’s
going to be the case again.”Regional retail, meanwhile, is another story.
Developers may still build speculative officespace in big cities, but the same does not
apply to retail. Big-box operators havea formidable understanding of regional
demographics, and target only sweetspot locations. That can work—for thebrave. “Regional retail is a pretty polarisingstrategy,” said the Asia CEO of a regional

brokerage, although Middle Easternsovereign funds have been buyers. “Thecity centres of those four or five cities will
be fine, but the regions around them arefacing terminal and irrevocable decline.”
Play those numbers right, though, andoperationally the investment works. “Theyield is there, the coupon is there, you’rehitting return targets—probably better onmany other investments throughout theworld,” the broker said. But your capital
may be stuck, surely with your shopping
centres finding few buyers of the assets.
The math then works only if your rental
yields and renewals have covered yourinitial investment. “Do you want to be theone left standing when the music stops?
The exit is blurry.”

Exhibit 1-8 Broad Sectors in Which Investors Are Now Active orPlan to Be Active in 2019

Homebuilding for sale

In Tokyo, for example, some foreign
investors have made headway converting
grade-C buildings to grade B, or updating
lower-grade office buildings to meet current
requirements for earthquake resistance orfireproofing. This is not a straightforward
exercise, though. “If you are just showing
up to do it, [you should] pack up andgo home, it’s not going to happen,” one
Tokyo-based consultant said. “If you find
one building to do that in a year, wonderful.
There are groups that have been there
since the mid-1990s and have always had
a presence and are looking to do the samething. Has that strategy been played out 10
years ago? Absolutely.”
The difference between first-class spaceand properties built in the wake of Japan’s
property bubble is now too stark for thetactic to work. Disaster proofing has

44%
86%
HotelsMultifamily/
rented residential

Office

55%

65%

58%
62%

RetailIndustrial/distribution

Source: Emerging Trends in Real Estate Asia Pacific 2019 survey.

become so expensive that it is often easier
to start over than attempt to upgrade tocurrent standards. “It’s grade C because
it’s super-old, or the floor plate is too small,or the location is subpar,” the consultant

said. “I can’t conceive of a situation where
putting a fresh coat of paint and lipstickon a building isn’t better than knocking it
down and rebuilding it.”

Emerging Trends in Real Estate® Asia Pacific 201912

Chapter 1: Calling the Top?

Build-to-Core Strategy Aims at
Institutions
Development is another strategy now
increasingly on investors’ radars, especiallywith so many institutional investors in
the market. The overall dearth of coreproperties in Asian markets, combinedwith an apparently limitless hunger forcore product, means that build-to-corestrategies have become a go-to option
even for risk-averse investors who would
normally regard development risk as abridge too far.
As a result, build-to-core projects,
particularly office space in underserved
markets such as India or even Seoul, havebecome common. “If we want a scalable
presence in India, is the stock going to be
there for the next five, 10, 15 years?” onecore investor asked. “If the answer is no,
you may want to start developing those.”
Call them accidental, even reluctant
developers. The temporary goosing
to returns from delivering a successfulproperty is highly desirable, though theultimate goal is to own a largely risk-freebuilding for decades. “You get rewarded

for the risk, but then you are left with thecore portfolio at the end,” the investor
explained. “At the end of the day, what
we’re chasing is income-producing
assets.”The Indian market is another destinationripe for development projects: “The market
is becoming institutional very quickly,”commented one opportunistic investor,and “development of office is where youwant to be, selling into that. The demandfor office investments over there is very,
very strong, and prices have gone up
significantly over the last two or three
years.”The objective is to produce assets of theright quality to outperform what’s alreadyin the market. “The market is oversupplied
pretty much across all sectors across
China,” another special-situations investor
said. “But in the right markets in the rightcities in the right assets, the product is notthere.” Development will therefore fill thatgap.
Interestingly, the same investor feelsthat China’s biggest cities are now

hitting a level of market maturity that isequivalent to that in cities such as London
and New York City. With effectively noland in city centres left to sell, and withsurrounding areas already developed formiles around, the natural response is forplanners and developers to focus insteadon opportunities to buy dilapidated,
underperforming, or outdated city-centre
assets and either reposition or redevelopthem.
For China, this marks the first time thatthe outlet for ever-growing price pressuresin downtown areas is to redevelop for
urban regeneration purposes rather thanhead for the expansive suburbs and makenew space. This promises to open a newparadigm of city-centre development
opportunities for foreign funds thatis not contingent on buying land incompetition with big domestic developers
at government auctions. “We are working
with partners to develop real estate that’s
not being met by current supply and is now
in demand,” the special-situations investor
explained, referring to one such project.
“The sophistication of the end users has
advanced beyond the property that’s
available.”

Exhibit 1-9 India Volume by Property Type

(Volume US$ billion)

Income-producing assets

Dev sites

Cross-border share %

8

70.0%

7

60.0%

6

50.0%

5

40.0%

4
30.0%

3

20.0%

2

10.0%

1
0

'11

'12

'13

Source: Real Capital Analytics.

13

Emerging Trends in Real Estate® Asia Pacific 2019

'14

'15

'16

'17

'18

0.0%

Return of Distress?
Finally, and given especially the perceptionof an approaching turn in the cycle,
investors are once again eying the potential
for distress plays in Asian markets. With
the possible exception of China, suchopportunities have been thin on the
ground for several years, and althoughfund managers are by now well aware that
distress in an Asian context is not as easy
to exploit as it is in the West, the potential
for higher returns is one that will be hardto pass up for fund managers sitting on
sometimes large stockpiles of dry powder(see chapter 2, “Stress and Distress” formore).
Interestingly, the topic of distress wasa recurrent theme during this year’sinterviews:
In Japan, one locally based investor
recounted how smaller regional banks
had been approaching fund managers
in Tokyo asking them to bid on thebanks’ nonperforming loan (NPL)
portfolios—the first significant indicationof distress in Japan in several years.
In Indonesia, foreign consulting firms
were reported to be advising local
banks on selling off their real estate
NPLs.
In India, domestic banks recently shut
down provision of debt capital to midmarket residential developers as theyreassessed their portfolios following
default by a large nonbank financial
institution. According to one locally
based interviewee: “In the last few
years, residential sales haven’t pickedup, so the developers have survived
by refinancing—paying off bank A byborrowing from bank B or a nonbank
financial institution. That game ofmusical chairs has temporarily come toa standstill.” As a result, many midtier developers are being now forced
to consolidate or put their land banks
on the market in order to meet debt
obligations.

In Australia, Chinese developers havebeen unable to complete some deals
after regulators tightened controls on
capital exports from China. This is notexactly a distress scenario, although
it does involve a forced divestment.
According to one local developer:“The deals I’m seeing so far probably
wouldn’t involve losing money—pricing
is good and it’s just a financing issue.
But ultimately, if the market continues
to slide even moderately, there might
be a pricing adjustment as well.”Emerging Markets Still a Draw
More adventurous investors have longeyed Asia’s emerging markets as apotential source of higher returns. Though
not for the faint of heart, emerging-market
investment is increasing as economies
grow and the base of investableassets grows with them. According to
one consultant: “It’s all ASEAN at the
moment—they’re all interested in thePhilippines, Indonesia, Malaysia, Thailand.
And Vietnam is hot, hot, hot.”“I think logistics was going
to be big in all those markets
anyway because they’re allunderserviced—if you pick one
sector, they’re always goingfor this one. I can’t talk enoughabout logistics with people, it’sthe ‘in’ subject.”

Another reason for the uptick of interestis that developing economies may benefit
from the budding trade war between the
United States and China. According to one
Manila-based developer: “The Philippines
is a largely domestic market that doesn’t
export a lot, so trade issues don’t usuallyaffect us. But we could soon see more
Chinese companies shifting operations
here to avoid U.S. tariffs.” Interviewees
operating in several emerging-market
countries reported that this process was
already underway, with demand in local
industrial and business parks surging as
Chinese companies take up space. In thisway, the trade war has proved a catalyst
for a process already underway. As one
consultant put it: “I think logistics wasgoing to be big in all those markets anyway
because they’re all underserviced—if you
pick one sector, they’re always going forthis one. I can’t talk enough about logistics
with people, it’s the ‘in’ subject.”

Emerging Trends in Real Estate® Asia Pacific 201914

Chapter 1: Calling the Top?

VIETNAM continues to be a major focus
for emerging-economy investors, with Ho
Chi Minh City ranked as the highest suchmarket (at number seven) in our investment
prospect poll. Vietnamese gross domestic
product (GDP) growth of 6.8 per centis the highest in the region, with strong
activity from both Chinese and Japanesemanufacturers.
Housing has historically been the focus
for foreign investors in Vietnam, usuallyin partnership with a local developer.
In addition, a number of deals haveoccurred over the last year, with foreign
investors buying into the platforms of local
developers. Market segmentation has now
shifted from the high to the middle partof the spectrum, as urbanisation leads
to ongoing demand for housing in large
urban centres. Ho Chi Minh City alone
has projected demand for new housing
amounting to some 400,000 units per year.
Worker-focused housing has widespread
appeal, therefore. One interviewee pursuing
an opportunistic strategy was focused
specifically on the 55 per cent to 65
per cent income percentile, translating
to homes that in Ho Chi Minh City costaround US$80,000. Quite simply, “that’s
what they can afford,” he said.
In the past, logistics facilities in Vietnam
did not factor as a priority for investors,
despite a booming manufacturing sector
and generally poor existing infrastructure.
That is changing now, though, boosted
by regulatory changes that allow foreign
enterprises to operate more freely in the
sector.
INDONESIA has been on the radar of
emerging-market investors for years, with
Jakarta nominated as our survey’s numbertwo investment prospect destination as
recently as 2015. Its stock has fallen more
recently, however, as a result of an ongoing
glut of office and residential supply. While
the market overall remains soft, there iscurrently significant foreign investor interestin the logistics sector, according to one
locally based consultant, due to a massive
undersupply of modern facilities. Even
here, however, activity remains muted given
the high prices demanded for industrial
land in established industrial parks. Other
potential areas of interest for private-equity

15

Exhibit 1-10 Reasons for Investing in Niche Sectors

Less competition
from other investors
13%
Stable income
returnDiversification

28%

Demographic
demand drivers

15%

21%

23%

Higher yields

Source: Emerging Trends in Real Estate Asia Pacific 2019 survey.

investors are in NPLs (investors must bewary of scams) and also in picking up bulk
purchases of residential units directly fromdevelopers with a view towards potentiallyconverting them to serviced apartments.

Niche Sectors Still in Demand
Meanwhile, higher-yielding alternative asset
classes also continue to gain traction:
LOGISTICS continues to be a goto theme, given preexisting structural
shortages and vast new demand driven by
e-commerce retailing. This is perhaps the
only sector where investor opinions were
uniformly bullish, and unsurprisingly thesector once again tops our sector survey
rankings. Developer willingness to build
new facilities without precommitments fromtenants is testament to the strengthof the market.
Investment allocations to the sector haverisen significantly in 2018, with action
centred on major cities in China, as wellas Australia and Seoul. One fast-growing
trend is the emergence of last-miledelivery hubs, again as a means of tapping
e-commerce growth. This implies demandfor inner-city distribution centres, withinvestors looking in particular at underused
and lower-grade office, retail, and industrial
spaces near city centres. It also boosts
demand for new technology, in particular
automated storage and retrieval systems
that can improve delivery speeds.

Emerging Trends in Real Estate® Asia Pacific 2019

This year, logistics infrastructure in
emerging markets has also become
a focus, given a near-complete lackof modern stock and fast-growing
manufacturer sectors. Demand is booming
in Vietnam, Indonesia, and especially India,
where the mid-2017 introduction of anationwide goods and services tax (GST)
has revolutionised how goods are delivered
across the country. With the government
now also according infrastructure status
to warehousing projects, “there is a huge
pipeline of demand for large build-to-suits
because there is hardly any ready-built
demand,” according to one local investor.
“So, the name of the game today is tobuy land and construct, or if you can pickup a brownfield site that already has theapprovals, then take it up and construct.
It is one of those rare sectors where thedemand side is completely outstripping
supply. With an approved piece of land, forevery good parcel there are least two or
three tenants waiting.” As another investor
commented: “Find me a more compelling
asset class than logistics in northern
India—I’d take that gamble all year long.”
DATA CENTRES were previously shunned
by real estate investors as too specialist,
but have since emerged as anotherin-favour niche. Debate continues as towhere they fit in an investment portfolio (asinfrastructure, tech, or real estate?), but
the returns on offer have today graduallyeroded these concerns.

The “big four” markets for data centres
so far are Singapore, Tokyo, Hong Kong,and Sydney, in declining size. In Asia, thisis where the “cloud” actually exists. Prices
have stabilised, and the high price ofland is encouraging the redevelopment of
low-end buildings and the repurposing ofbrownfield sites.
That said, the fastest-growing opportunity
is probably in China, which continues tosee rapidly rising demand for network
services but which suffers from chronic
shortage of infrastructure. “It’s a pretty
unique opportunity that has economics not
associated with the product elsewhere,”
one opportunistic investor in China said.
Cash yields in the low teens are achievable,comparing favourably to Shanghai officespace, for example, which currently
provides sub–4 per cent returns.
While undersupply exists across the board,the investor noted, there is a particular
shortage of data-centre space to support
growing cloud data, an area where all ofChina’s biggest private entrepreneurs—
Alibaba, Tencent, and Baidu first among
them—are looking to capitalise. Beijing
has only added to the shortage byrequiring that all Chinese data be stored
domestically.
China’s data-centre industry also features
significant barriers to entry. Licensing
is problematic, as is the acquisition ofadequate power supply from China’s
electricity network. Operators with the right
permissions in place can therefore afford to
be selective in their choice of investors.
Still, institutionalisation of data centres
in other Asian nations is also inevitable,
proponents say, just as Asia’s digitisation
is itself unstoppable. South Korea is bymany measures the most-wired nation on
the planet. And in emerging markets such
as India and Southeast Asia, increasing
numbers of rural or low-income residents
continue to migrate online, usually via
cellphone data networks.

Exhibit 1-11 Prospects for Niche Property Types in 2019

Data centres

6.30

Senior housing

6.11

Shared/serviced offices

6.00

Student housing

5.95

Affordable housing

5.90

Business parks

5.61

Self-storage

5.44

Resorts

4.79

1
2
Abysmal

3

4

5
Fair

6

7

8

9
Excellent

Source: Emerging Trends in Real Estate Asia Pacific 2019 survey.

Exhibit 1-12 Niche Sectors in Which Investors Are Now Active orPlan to Be Active in 2019
Resorts
52%

30%
Senior housing

Shared/serviced offices

28%

Self-storage

41%

Affordable housing

46%

42%

46%

Data centres

Student housing

43%
Business parks

Source: Emerging Trends in Real Estate Asia Pacific 2019 survey.

Growth of the data-centre industry inthose locations is now fragmented andfraught with regulatory difficulties. But there
remains great scope for rapid expansion of
the industry across Asia going forward.

Emerging Trends in Real Estate® Asia Pacific 201916

Chapter 1: Calling the Top?

Worker Housing Cuts
Commutes
The ongoing process of urbanisation incountries across Asia brings with it higher
wages and better standards of living as
workers migrate to higher-paying jobs
in the cities. At the same time, however,the urban sprawl resulting from rapid
population growth means the commute toinner-city jobs has become problematic.
Worsening gridlock on the roads of Manila,
Jakarta, Bangkok, and beyond is therefore
creating demand for worker or dormitorystyle housing located nearer to workplaces,
thereby eliminating the need to travel. Nor
is commuting the only problem—market
segmentation is also an issue, according
to one investor keen on such facilities. At
the moment, “a lot of [the existing housing]is just wrong—wrong size, wrong position,
wrong marketing—there’s no access topublic transport, you just can’t make itwork.”

Government Policies Boost Affordable Housing
The unprecedented rise in Asian housing costs resulting from a long period of ultralow interest rates has resulted in the introduction of a variety of new policies by Asian
governments aimed at restraining home price growth, most obviously through levying
new taxes. While these have had limited impact in containing upward movement in homeprices, in some cases government housing policies have proved strikingly successful. In
particular, the use of subsidies, provision of land and infrastructure, and the removal of
red tape in planning and approval processes by authorities in a few emerging economies
has led to the creation of booming new markets in housing for low-to-middle-income
earners, often via projects located on greenfield sites outside metropolitan areas thatconnect to the inner city by new rapid transit facilities.

The Philippines has emerged as apromising market in this space because
many workers live, for example, a long way
from where many new business process
outsourcing (BPO) operations are being
built. “There are some guys doing somereally smart things with worker housing inand around Manila and Clark,” said one
investor, “but it’s very small-scale—getting
the scale you need with the transparency
you need and the returns you need is hard.
It’s a bit bitty.”

Exhibit 1-13 Least-affordable Housing Markets in the World
Global rank(least affordable)

Median multiple

1

Hong Kong

2

Sydney3

Vancouver

4

San Jose5

Melbourne

6

Los Angeles

8

San Francisco

9

Auckland10

London12

Toronto16

Adelaide

18

Brisbane

21

Perth

32

Singapore

33

Tokyo

74

Osaka
0

2

4

6

8

10

12

14

16

18

Note: Median multiple is the median house price divided by median household income.
Source: Demographia.

17

Emerging Trends in Real Estate® Asia Pacific 201920

This type of housing was formerly
neglected by local developers due to theirpreference for higher-margin housing
at the top end of the market. However,with prospects for high-end housingmuch subdued as a result of overbuilding
and/or high prices, growing numbers ofinvestors—both local and foreign—are
now looking at options in the “affordable
housing” niche, aiming at a demographic
somewhat higher up the pay scale thansubsistence workers.

mark. It was because they thought they’dbe able to acquire land and get approvalin a year. It actually took them more than
three, so all their business plans went out
the window.” The government now has
plans to help facilitate these processes
by offering foreign investors access togovernment-owned land reserves that
already have approvals in place.

In Indonesia, for example, a presidential
manifesto has mandated construction of amillion units of affordable housing per year
since 2015, with some 2.4 million units
created by the end of 2017, according to
official figures. The government recently
created a catalyst for the programme byremoving the minimum loan-to-value (LTV)
requirement for mortgage lenders, allowing
buyers in principle to obtain 100 per centmortgages. It is also reportedly considering
use of 3-D printing to create new affordable
housing stock. The dynamics of thatmarket have been addressed in previous
issues of this report.

Rising housing costs in major markets
across Asia have translated to ever-smaller
living spaces as developers continue to
cut unit sizes. One consequence of thisis the rise of co-living facilities in the mostexpensive urban areas. As in the West,these generally comprise a hotel-roomsized living area paired with access tocommunal spaces such as a kitchen, aliving room, break spaces, a rooftop, anda gym.

India is another market where thegovernment has ambitious plans to create
tens of millions of low-cost housing units.
Authorities have provided a range ofincentives to facilitate the process by wayof lower taxes, public/private partnerships,
alternative technologies, and higher floor/area ratios, together with subsidies oninterest rates, approvals, infrastructure
provision, and land conversion processes.
As ever in India, bureaucratic inefficiency
has meant that the number of completed
units has not been as high as originallyforecast, but major progress has been
made nonetheless. Over the last 12
months, a number of large foreign investors
have announced plans to participate in
the sector, either directly or via an Indianaffordable housing fund.
According to one local player, the major
logjam for foreign investors in this area
is with land acquisition, conversion, andapproval risk, which can take years toaddress. In the past, he said, “foreigners
have suffered in this sector not because oflack of demand, or their ability to develop,
or because their tech was not up to theCo-living – Template for the
Future?

Hong Kong, the least affordable city inthe world according to Demographia’sannual ranking, is ideally suited for co-living
facilities. The concept is aimed at young
university graduates heading into theirfirst jobs who want a living space outside
the often-crowded family home. Lowgrade hotels are often good candidates
for converting to co-living spaces. The
downside is that the capital expense
is relatively high for what is largely an
experimental concept, especially if it isexpensive to modify back into a hotel oroffice space should the co-living concept
prove unviable. “In very high-cost markets
like Hong Kong, there’s no reason why you
couldn’t make money on it,” one investor
said of the strategy. “But it’s expensive tofail.”
Co-living spaces in Asia differ in various
ways to the model that has evolved in theWest. In China, for example, where coliving has been embraced enthusiastically,tenants are not drawn simply on the
grounds of cost. While they are usuallya younger demographic, they often
have plenty of money, tend to be highly
educated, feature a high proportion of
females, and are in general drawn by
the convenience, safety, and trendy
neighbourhoods where such facilities areoften located.

Facility management, meanwhile, tends
to be very app-based, partly because
Chinese millennials are so adept at using
handsets, and partly because it offers
operators a way to capture an entire value
chain of related services. As a result,virtually everything connected with theco-living lifestyle in China can be doneusing an app, from property searches,to contractual issues, to maintenancerequests, to door-to-door removal services.
The bigger players even offer online interior
design options selling proprietary ranges offurniture.
One reason why co-living may prove a
hit in Asia is that small living spaces are
already the norm. Users are therefore
probably swapping one cramped space foranother, but gain their independence into
the bargain. Ease of use is another factor.
According to one Tokyo-based investor:“I think for singles the co-living concept isgoing to be the norm going forward, but
I don’t think it’s about having the shared
kitchen and common areas as much as
it is about flexibility. So you have flexible
lease structures, you have furnished units,
you make it easier for people to get in andget out, and instead of four to five months’
upfront deposits, agency fees, andeverything else, you pay just one monthand you have it furnished. It just makes it
easy.”

Multifamily – Slow but Steady
Asia’s build-to-rent markets continue tomake inroads, though progress is slow
in an environment where institutional
involvement in multifamily developments(outside Japan, anyway) is practicallynonexistent. Still, the market in China has
seen rapid growth over the last coupleof years, incentivised by government
policies requiring developers to allocate
a percentage of all newly built projects to
the rental market. Private-equity funds—
many of them foreign—are now actively
involved in China’s multifamily markets,
where the biggest operator currently
controls upwards of 500,000 rooms andthe total stock nationally now amounts tosome 1.66 million units, according to press
reports.

Emerging Trends in Real Estate® Asia Pacific 201918

Chapter 1: Calling the Top?

Australia: Key Themes
With Melbourne and Sydney occupying
two of the top three places in this year’s
Emerging Trends investor prospects
survey, Australia remains the single mostpopular investment destination in the
Asia Pacific. Unsurprisingly, fundamentals
remain strong. In the first half of 2018,
prime office rents in Sydney and Melbourne
registered growth of 12.5 per cent and10.7 per cent respectively over the same
period in the previous year, according to
JLL.
Already-low vacancy levels continue todecline, and with very little new supply inthe pipeline, pressure on rents seems set
to continue, with projected increases ofmore than double the long-term averageof 4.5 per cent—among the highest in theregion. What’s more, an experimental pushseveral years ago by some larger tenants
to decentralise by shifting a percentage ofstaff to suburban locations appears now
to have ended—accounting firms and the“big four” banks have reversed their policy
and reverted back to the central business
district (CBD) after they encounteredproblems in attracting and retaining
staff. This is putting further pressure on
occupancy rates.
Although yields in Australia continue tocompress (into the low 4s for opportunistic
and just under 5 per cent for portfolio
deals, according to one locally based
investor), they remain higher than thosein other Asia Pacific gateways, further
boosting the appeal for international
investors. Finally, cap-rate “leakage” in theform of hefty tenant incentives that tend to
distort the actual level of local yields is also
falling.
As usual, however, the real problem inAustralia lies in actually getting money into
the market. Although activity by Chinese
buyers has ebbed in 2018 due to problems
moving capital out of China, other foreign
institutional buyers (especially American)
have been happy to take their place.

Such rapid growth, however, brings
with it predictable growing pains. Rental
operators have failed to comply withgovernment edicts to develop new rental
units, instead renting existing apartmentsfrom owners, sprucing them up, andsubletting at a premium, sometimes
double, to what they previously fetched.
Beyond that, the emergence of an
institutional market for rental properties in
China (and indeed in Asia generally) faces
a fundamental challenge. “The problem isthat the yields are unattractively low,” said
one China specialist, with investors facing
returns as low as 2 per cent. “It means you
have to take a longer-term view that you
can develop a platform and grow yield in aline over time.”

19

Emerging Trends in Real Estate® Asia Pacific 2019

The result is that foreign buyers currently
account for some 40 per cent of alltransactions for prime assets in Australia.
According to one local investor: “The issue
that’s forcing domestic REITs and funds
out of that market is because [their] cost ofcapital can’t compete—it’s basically foreign
capital displacing local capital.”
Why is Australia such a magnet forforeigners? It’s that “we just tick the boxes
for global mandates—the fact that Australia
is triple rated ticks one box, and its primecommercial, so that ticks another box. It’s
also just a weight of capital issue, and thefact that they’re still getting a good risk
spread premium even on those [tight]
cap rates.”
Another way for both foreign and local
capital to access the market is via unlisted
funds, where core exposure is now
coming available. The driver for this is that
Australian superannuation funds and otherinstitutions with large holdings of local
property are compelled to sell if capital

Exhibit 1-14 Prospects for Commercial Property Types in 2019

Office 6.46
Industrial/distribution 6.32
Multifamily/rented residential 5.72
Hotels 5.64
Homebuilding for sale 5.28
Retail 5.07
1
2
Abysmal

3

4

5
Fair

Source: Emerging Trends in Real Estate Asia Pacific 2019 survey.

6

7

8

9
Excellentvalues increase (as they have), leaving themwith greater exposure to real estate thantheir allocations allow. “It’s an opportunity
we haven’t seen in the last six or sevenyears,” said one Sydney developer. In thepast, open-ended funds “have had queues
to get in. What we’re seeing now is theability for offshore investors to finally beable to access some of these funds via
the secondary units that are available.”With so much capital targeting core assets
in Sydney and Melbourne, other cities are
now getting more attention. The appeal islimited, though, given the volatile nature ofthese markets. Both Perth and Brisbane
currently have vacancy rates in the 20
per cent range, and migration to theselocations has also slowed dramatically.
According to one local player: “It’s probably
more of a theory than an ongoing trend.
Weight of capital is forcing people into
those markets because they can’t findother places to put their money. They’re
not necessarily looking for better returns,
though they’ll demand them, [they’re] justOver the long term, the government willprobably have to reduce the cost basis tobring scale to a fragmented industry. “Ifland is priced well, you’re going to haveinterested buyers,” the investor said. “And
if you build a business across cities, youhave the ability to build a good brandname in micro apartments, rentals, sharedcommunities, things of that nature.”
Meanwhile, compounding matters,
breakneck growth is creating cash-flow
complications that only add to the pressureof low margins. At least seven Chinese
rented-flat operators are reported to havefailed in 2018.

looking for places to put their capital. But
it’s pretty cautious capital in those markets[because] they tend to be more cyclical.”On the residential side, activity has slowed
as home prices inch lower. According to
one local residential developer, home pricedeclines have been led by a softening
investment market caused by “progressive
taxes that have disincentivised foreign
buyers, and by a strategic progressive
reduction in investors’ loans.” Beyond
that, “product is also drying up because
the rationing of credit means thatdevelopments don’t go ahead, so we’reseeing a progressive decline in supply
for that market as well.” As a result, “I
think we’ve seen the peak in terms of thedelivery cycle. It’s really about how long will
it take to gear up again, since inevitably
there’s going to be a trough over the next
18 to 36 months. It takes a long time
to wind up, though probably people will
persist with approvals to get ready in theevent that the market comes back.”

In other markets, growing pains are also
evident. In Australia, recently introduced tax
breaks have sought to provide a measureof support, but progress so far has beenminimal. According to one Sydney-based
developer: “A lot of local players are talking
about multifamily, and we have some of
the U.S. players in the market here withmandates. But the tax concessions haven’t
really addressed the issue, so we’re notseeing any real investment. Some of thelarger developers will just build strata
apartments or condos and hold themfor rent, just to practice and get into thatmarket. But when you’re competing for thesame block of land against a residential

This year, Chinese money has becomeless apparent in local residential projects,
partly due to tightening of controls forcapital exiting China and partly because
Mainland developers are now more familiar
with Australian markets. According to one
Sydney-based developer: “[Chinese capital]is playing now in all aspects, some of it
buying urban land for development, someB-grade office for development later—they
have an appetite for all sorts of asset
classes more in line with the Australianmarket.”developer, build-to-rent doesn’t get
close—it can’t compete to buy the land.
Part of that is because the tax concessions
aren’t working and also the zoning isn’t
specific, so there’s no advantage from azoning point of view.”
A more activist approach from governmentthat provides real incentives for developers
to pursue multifamily projects will beneeded before the industry can gain
traction. The same applies elsewhereacross the Asia Pacific.

Emerging Trends in Real Estate® Asia Pacific 201920

Chapter 1: Calling the Top?

Coworking Questions Remain
Over the last three years, the shift globally towards adoption of coworking and, more generally, open workspace environments
represents probably the most rapid evolutionary change the commercial office sector has ever seen. Rollout of WeWork-style spaces
has been exponential in every major market across the Asia Pacific and shows no sign of leveling off. “It’s like a weed,” one Tokyobased investor described it. “You can’t kill it, it just keeps growing.”
Exhibit 1-15 Occupier Trends That Investors Believe Have the Most Impact
on Real Estate Value

Flexible space

42%

Diversification from tradition
Smart buildings
Co-living
Experiential retailLast-mile logistics
Automation
0%

10%

20%

30%

40%

50%

Source: CBRE.

Exhibit 1-16 Locations Where Occupiers Intend to Increase their Space
over the Next Two Years

Office in major business districts
Office in decentralised locations
Co-working centre

33%

CBD officeCampusServiced officeBusiness park
0%

10%

20%

Source: CBRE.

21

Emerging Trends in Real Estate® Asia Pacific 2019

30%

40%

50%

But while the inherent advantages of open
workspaces—more efficiency, lower costs,
higher worker satisfaction—mean that theformat is here to stay, opinions differ about
the sustainability of the business modeland the industry’s path forward. Since
most major operators remain privately
held, their finances remain opaque, but
enough can be inferred to conclude thatindustry finances in general do not stack
up. According to one landlord in China:“We have a building that we have leased
to a very famous coworker that is paying
equivalent of 200 yuan per square foot.
The going rate in the area is only 180,
maybe 170 yuan. I don’t see how they cango out and find a subtenant who is willingto pay more than 200 yuan and walk awaywith a profit.”
That implies that when industry growth andventure capital funding eventually slow,
a reckoning will come. “At some point,
clearly we’re going to go through a change
in the cycle,” a fund manager in Japan
commented. “There’s going to be somelevel of correction, and no one has any idea
how [the industry] is going to handle that. I
personally don’t know if it works in a down
market.” That is because in a downturn,some of the tenants that rent space fromcoworking operators on a monthly basis
are likely to walk away, leaving operators—
who are probably renting space fromlandlords on a five- to 10-year basis—holding the bag.
One popular idea is that landlords
will eventually step into the operatorrole themselves, developing in-housecoworking brands extending across theirportfolios, and designating a certain portionof their buildings as flexible workspace
available for use by tenants on an ondemand basis. Indeed, globally, some are
already adopting this approach.

But whether asset managers in general
have the skillset to play this role is, inturn, open to question. According to
one fund manager: “Let me be not thefirst one to call foul on that—most asset
managers aren’t capable of taking it overand providing the same level of service[as coworking operators]. Because if theywere, they wouldn’t rent to WeWork,they’d just go do it themselves.”

Exhibit 1-17 Projected Change in Economic Factors, Next 3–5 Years
WorsenNo change

Improve

Cost of financeConstruction costs
Yield compression
Global economic growth

A different solution, then, may prove
to be a partnership between landlords
and coworking operators, with the latterproviding design and operational services
directly to building owners. Alternately,
operators may buy entire buildings (asAirbnb is already doing within its own
niche) and become asset managers
themselves.

Competition from Asian buyers
Availability of investable properties
Asian economic growth
0%

20%

40%

60%

80%

100%

Source: Emerging Trends in Real Estate Asia Pacific 2019 survey.

Very likely, a variety of models are going toemerge. The only thing for sure is that theindustry is certain to evolve.

Rate Hikes Loom
Slow but steady increases in U.S. interest
rates are playing an incrementally more
important role in determining capital
flows worldwide. The Federal Reserve
Bank is widely predicted to introduce afourth 25-basis-point rate rise for 2018
in December, with two further rate hikes
projected for 2019. The threat of higher
interest rates did not emerge as a particularconcern for most investors in our survey,
however, with the cost of finance ranking
next to bottom amongst a list of potentiallyproblematic issues (see exhibit 1-5). “I
don’t think people are expecting interest
rates to blow out,” one opportunistic
investor said. “But everybody is looking
to see what the next slap across theshoulders is going to be.”Because rising interest rates in the UnitedStates make American fixed-income assets
more attractive, capital is beginning toleave emerging markets to seek a homein the United States. There are various(and potentially profound) implications tothis shift, although the effect will vary frommarket to market. The biggest impact islikely to be felt in emerging markets, where
currencies are depreciating against the
dollar. As a result, India, Indonesia, and thePhilippines have all raised interest rates inorder to support their currencies and fightinflation.
Rising interest rates could have a significant
impact on real estate markets in Southeast
Asia, where cheap capital from domestic
banks has been one of the drivers of theregional development boom. One Manilabased developer identified higher rates as“one of the big concerns locally,” notingthat they could prove beneficial for foreign
investors who have for years struggled tocompete in local markets because theirhurdle rates make them uncompetitive
compared with the cost of financing via
local banks or bonds.
Japan is also facing the prospect of higher
rates. The government has been engaged
in unprecedented fiscal and monetaryeasing since 2013 that has depressed
domestic interest rates to around zero.
However, there is now a growing convictionin the market that the Bank of Japan(BoJ) may finally move slowly to increase
the cost of capital. BoJ purchases ofJapanese government bonds (JGBs) havebeen quietly tapering in recent months,
and a Goldman Sachs report in Octobersuggested that quantitative easing could fall
to 2013 levels by the end of 2019.

According to one Tokyo-based fundmanager: “If you look at Japanesecompanies, they have record profits andrecord amounts of cash on their balance
sheets. So the corporations now can start
to pay more for debt, and [rates] don’t
need to be at zero because they havecash on the balance sheet they can use
to service it. So if the BoJ is going to lookat when they start to tweak rates up a bit,
I don’t think they’re going to find a better
time than now.”
Meanwhile, the Australian dollar has also
weakened against the U.S. dollar, and is
expected to weaken further. However, theReserve Bank of Australia has left interest
rates unchanged for more than two years
and is not expected to raise rates until thesecond half of 2019 at the earliest.
Finally, while Hong Kong is a largely
equity-driven real estate market, interest
rates there have just begun to rise, too.
A bigger concern, however, is the Hong
Kong dollar’s peg to the U.S. dollar, whichmeans that local assets are becoming
less attractive to Mainland Chinese buyers
as the renminbi continues to head south
against the U.S. dollar.

Emerging Trends in Real Estate® Asia Pacific 201922

Chapter 2: Real Estate Capital Flows“Investors coming to the Asia Pacific are fundamentally under-allocated to
Asia and understand that the fundamentals are dramatically stronger inthis region.”
As a percentage of commercial real estate
investment in the Asia Pacific, crossborder capital is now at the highest levelin a decade. According to Real Capital
Analytics (RCA), in the year ending June
2018, some 34 per cent of transactions
involved funding from cross-bordersources, coming from either within Asia or
globally, compared with 32 per cent in thesame period in 2017.
A notable feature of the most recent capital
flows has been growth in investment fromthe United States, which RCA data show
totalled US$8.6 billion during the year.

Japan was the most popular destination,
followed by Hong Kong (although thisfigure was inflated by a single large deal)and Australia.
However, as usual, local investors continue
to be the dominant source of cross-borderinvesting in the region, with intraregionalflows reaching a record US$34.3 billion
during the year—more than two and ahalf times the total for the same period a
decade ago. That said, outgoing flows from
China have slowed dramatically in 2018,
largely as a result of domestic regulatory
restrictions.

Exhibit 2-1 Transaction Volume by Buyer Profile (Average of 2012–1H 2018)
JAPAN

AUSTRALIA
8%
40%

CHINA
12%

21%

7%
27%

18%

73%

75%

Total

Cross-border only

32%
46%
14%

79%

60%

12%
41%

Total

26%
Total

Cross-border only

HONG KONG

SINGAPORE
25%

28%

Cross-border only

24%

SOUTH KOREA
20%

17%

18%

13%

72%

75%

56%

26%

83%

34%

24%

12%
Total

Cross-border only

Total
Domestic transactions

Cross-border only

50%

Total

Cross-border only

Cross-border transactions

Cross-border capital from Asia Pacific (ex. China)

Cross-border capital from China

Cross-border capital from Americas

Cross-border capital from Europe

Cross-border capital from Middle East and Africa

Cross-border capital from others

Note: Based on independent reports of income properties and portfolios, US$10million or greater. Income properties include the following property types: apartment,
office, retail, industrial, and hotel.
Source: Real Capital Analytics.

23

Emerging Trends in Real Estate® Asia Pacific 2019

Exhibit 2-2 Major Capital Flows within Asia Pacific2
85GERMANY
US

CHINA

1

JAPAN

10
3

HONG KONG
6

INDIA

9

SINGAPORE

7

4
Rank

Route

Vol (US$m)

YOY change

1

China to Hong Kong

5,637.2313%

2

United States to Japan

4,216.8

6%

3

Hong Kong to China

3,708.6-40%

4Singapore to Australia

3,316.2

32%

5

China to Japan

3,298.5

8%

6

United States to Hong Kong

3,250.9781%

7

United States to Australia

3,117.633%

8

United States to China

2,095.532%

9

United States to India

1,840.0489%

10Germany to China

1,582.2

AUSTRALIA

Note: Apartment, hotel, industrial, office, retail, and senior housing transactions included. Entity-level deals included. Development sites excluded. Data are forthe 12 months to 31 June 2018.
Source: Real Capital Analytics.

While domestic capital still dominatespurchasing in all markets (the long-term
market share of cross-border capital varied
between 17 per cent in South Korea and40 per cent in Australia), global capitalis more evident at the top end of themarket. According to one U.S. investment
manager: “If you were to focus on deals
of $100 million and above, I believe you
would see more overseas institutional
capital in these markets. It is harder to getdata from a decade ago, but the average[today] of around 25 per cent of deals
being cross-border capital was under 20
per cent then.”
Australia remains the most cosmopolitan
market in the region, with offshore capital“flowing thick and fast” into major cities,
according to one Australian developer.
This is “driven by numerous factors, but
Australia is a triple A–rated country, so it’salways going to attract institutional money.
We’re also seeing Asian high-net-worth
capital from Singapore and Hong Kongchasing prime assets.”largest superannuation funds, andAustralia’s sovereign funds. This may be
set to change, however, given how fast
superannuation fund capital is piling up—
an increase of some 7.5 per cent annually
dwarfs that of the stock of domestic coreassets, which is growing at less than 2 percent annually, according to JLL.

In contrast, outbound capital from Australia
remains subdued, perhaps unsurprisingly
considering the outperforming domestic
market and lingering memories of bad
experiences for Australia investors
in international markets following the
global financial crisis. At present,
outbound investment is limited to asmall number of large developers, theForeign-exchange movements and hedging
costs have also become significant factors
in 2018. One large global fund said thatcurrency effects wiped a percentage
point off third-quarter performance of its
global real estate fund. At the same time,
there are also benefits—both Japan andAustralia are now both more attractive to
U.S. dollar–denominated investors than ayear ago.

Emerging Trends in Real Estate® Asia Pacific 201924

Chapter 2: Real Estate Capital Flows

Japan’s Great Wave
Japanese institutions control some of thebiggest pools of investment capital in theworld, but have so far been slow to join
the outbound exodus seen elsewherein the region. Again, this may be set tochange, however. In September, Japan’s
Government Pension Investment Fund(GPIF), which manages the world’s largest
pool of retirement savings with close to¥156 trillion (US$1.4 trillion) in assets,
awarded its first mandate for global realestate investment—a move expectedto pave the way for the nation’s smaller
pension funds to follow suit.

Exhibit 2-3 Asian Outbound Investment
H1 2017

H1 2018

China

Japan

Singapore

Hong Kong

South Korea

The Japanese shift offshore has been
forced on them by the need to improve
returns. Their default strategy of buying
low-yielding Japanese Government Bonds(JGBs) has now become untenablebecause JGBs currently yield next tonothing and local institutions need to growassets to match upcoming liabilities asJapan’s population begins to age rapidly.

Forging relationships with gatekeepers istherefore likely to be crucial for international
fund managers seeking access toJapanese institutional capital.

GPIF did not reveal the size of the mandate,or its target real estate allocation, but it
has a 5 per cent allocation to alternatives,
including real estate, private equity, andinfrastructure. Even assuming an allocationof just 1 per cent, that would result ininvestments of some US$14 billion to thesector.

According to one Japanese investment
manager, the Japanese initially will “startout with too many managers with a little bitof money,” each provided with mandates
as small as US$50 million. “After they see
performance, they’ll narrow it down andstart becoming a little bit more selectivewith larger investments.”“This is huge,” said one fund investment
manager. “Their pot of capital is enormous,
so it will be billions of dollars over time,
and the rest of the public pension funds
and small corporate pension funds will
follow their lead; GPIF will set a benchmark.
However, I wouldn’t get too excited about
anything happening with any huge amountof speed.”

Still, the Japanese will not be looking toshoot the lights out. Initial targets are U.S.
core open-ended funds, since these offer
both diversification away from Asia risk,
and a measure of security and liquidity.
“We’ve seen very little interest anywhere
further up the risk curve,” one capital-raiser
said. Once the cost of currency hedging is
included, returns from such funds will be
low single digits—small potatoes maybe,
but an order of magnitude better thanreturns on the JGB.

In contrast to the wave of Chinese
investment that appeared between 2013
and 2017 and which was characterised bysubstantial investments in direct property,
Japanese institutions are expected to focus
more on indirect investment and adopt a
more measured approach. GPIF awarded
its mandate to a large global fund with amultimanager strategy and also appointed
a Japanese gatekeeper to oversee theaccount. Other Japanese institutions are
expected to adopt a similar approach.

25

0

3

6

9

12

15

18

21

24

27

30

US$ billion
Source: Real Capital Analytics, CBRE.

In the Asia Pacific, investing in regionalcore funds is more problematic, partly
because most pan-Asian core funds
already have a significant allocation to
Japan and partly because the Japaneseare seeking to diversify to markets beyond
their own backyard. Some investment in
Asia is occurring, however, as Japaneseinstitutions follow the path blazed byEmerging Trends in Real Estate® Asia Pacific 2019

domestic developers, particularly into
Southeast Asian markets. According to one
Japan-based investment manager: “Manytimes, when you see the big developers[invest in] assets, it is only partially fromtheir balance sheet—for the most part, itis actually Japanese pension funds behindthem.”The last time that Japanese investors
ventured outside Japan was during the
bubble of the late 1980s, when late-cycle
buying led to huge losses. However, “arepetition of the bubble won’t happen
this time as most investors now are very
disciplined compared to the past.”

China’s Tide Retreats
Several years ago, Chinese real estate
investors took to the world stage bymaking dramatic but sometimes poorly
underwritten flagship purchases of large
trophy assets and development sites.
Today, however, times have changed:
the Chinese government has reined in
exuberant investments and in some cases
compelled the sale of recently bought
assets. In addition, regulatory restrictions
have greatly reduced Chinese outboundcapital flows.
CBRE data show Chinese outboundinvestment in the first half of 2018 of just
US$5.26 billion, compared with US$25.6
billion for the first half of 2017 andUS$35.41 billion for the whole of 2017; if
this decline is repeated in the second halfof 2018, Chinese outbound investment will
fall to its lowest level since 2013.
RCA data, meanwhile, show Chinese net
investment in the United States averaged
less than US$100 million per quarter in thesecond half of 2017, and that the Chinese
became net sellers for the first time inthe second quarter of 2018. Chinese
retrenchment has been felt in Asia Pacificmarkets, too, particularly in Australiaand Hong Kong, where the volume ofcommercial property transactions fell bysome 65 per cent year-on-year in thethird quarter of 2018 to US$2.5 billion,
according to CBRE.
“The China tap is substantially off, but
we’ve seen pockets of interest in different
sectors that are aligned with government
policy,” said one fund manager. “So,there’s still an appetite for sectors likesenior living and real estate associatedwith medical or life sciences. Where we’reseeing the tap totally shut is speculative or
trophy investments.”

overseas real estate as long as neither
debt nor equity capital is provided by aChinese company or individual. This raises
the possibility that Chinese investors canrecycle capital already invested overseas
and use offshore debt to continue their realestate businesses.
For now, the big question is when Chinese
outbound investment will recover. “It’sanyone’s guess,” said one investment
manager. “We constantly have this
discussion internally. It is very clear that
Chinese institutions, especially insurancecompanies, want to be exposed to thereal estate sector and right now, their realestate holdings, as a percentage of overall
assets, are at 1 or 2 per cent at most. We
were optimistic this would last for a year or
two, and then in a very gradual way theywould begin to open up again. I would liketo still believe that is the case.”

Singapore and Hong Kong
Take Up the Slack

However, Chinese investment in overseas
real estate is unlikely to dry up altogether,even if restrictions remain in place.
Firstly, sovereign funds such as China
Investment Corporation are not affectedby the restrictions, and will continue toinvest abroad. Furthermore, Chinesecompanies that operate overseas canstill invest in properties for their own
occupation. Investment in infrastructure
projects for industry-oriented facilities, suchas industrial parks, technology parks, or
warehousing and logistics parks, is also
continuing.

CBRE data show Singapore as the largest
source of Asia Pacific outbound investmentin the first half of 2018, with US$9.06
billion of capital deployed. Starved of yieldand opportunities at home, Singapore
real estate investment trusts (REITs) anddevelopers have been buying overseas,
especially in Australia, Southeast Asia,
and Europe. In addition, Singapore
acts as a through port for capital fromthroughout Southeast Asia and indeed
globally, performing the same functionthat Hong Kong does for Chinese capital.
The favoured destination for Singaporean
capital in the first half of 2018 was Europe,
according to CBRE, with US$3.4 billion of
investment.

Chinese investors are also looking at realestate platforms as a proxy for real estate
investment, said one manager. “There’s
still appetite to invest in platforms to takestakes in management companies, andwe’ve seen quite a lot of inquiries about
opportunities for Chinese investors to dothat.”

London was the destination for asmuch as 26 per cent of Asian outboundcapital in the first half of 2018, with both
Singaporean and Hong Kong investors
active in the British capital, shaking off
concerns over the United Kingdom’s
impending departure from the European
Union.

Perhaps the most significant clarification
related to overseas investment was the“offshore carve-out,” which stipulates
that Chinese companies may invest in

Emerging Trends in Real Estate® Asia Pacific 201926

Chapter 2: Real Estate Capital Flows

South Koreans Turn to Europe
and Debt
Investors from South Korea continue tobe major outbound investors but have tosome extent changed their strategies due
to concerns over currency and returns.
Currently, the high cost of hedging against
the U.S. dollar can cut two percentage
points off returns from South Korean equity
investments in U.S. real estate. However,
Korean institutions are able to invest inreal estate debt without foreign exchange
hedging. As a result, in the first half of2018, Koreans became the largest single
foreign investor in U.S. real estate debt.
The preference for debt is also a reflectionof a belief among Korean investors thatwith U.S. markets now late in the cycle,
debt investments offer more downsideprotection in the event of a correction.
A more favourable foreign-exchange(FX) environment is also pushing South
Korean institutions to invest in Europe.
As one investment advisor said: “We’reseeing a lot more interest in Europe from
Korean institutions. Currency hedging is
an interesting dynamic, because there’s
actually an FX premium for [Koreans]27

investing in euro-denominated markets.”
In recent years, European investment fromSouth Korean institutions has shifted awayfrom the United Kingdom into continental
Europe, with Germany, France, andBelgium preferred destinations.
Finally, and in a move that may be
indicative of future plans of other Asian
institutions, South Korean capital has
begun looking for higher returns bymoving up the risk curve. For now, this isrestricted to the domestic market, where
the historical preference has long been for
single-asset vehicles or club deals focusedon core assets. This is beginning tochange, however. “Korean investors tend
to follow a few leaders. We expect overtime more institutions to take a closer lookat the domestic value-add market,” theinvestment advisor added.

U.S. Investors Up the Pace of
Asian Investment
Already the number-one source of crossborder capital globally, activity from U.S.
investors increased 20 per cent year-onyear in the first half of 2018, RCA data
show, with US$28.6 billion placed. The
share of Asia Pacific–bound capital rose

Emerging Trends in Real Estate® Asia Pacific 2019significantly to 30 per cent of the total, up
from 17 per cent the previous year.
The biggest change saw U.S. investors
increasing activity in China and Australia,
with capital flows rising 215 per cent and138 per cent respectively. Unusually,
U.S. investors have also made significant
investments in Hong Kong, and were also
responsible for most of the overseas capital
placed in Indian real estate, with US$1.84
billion of investment in the first half of2018—a fivefold increase.
Notwithstanding this, Japan remains
the biggest Asia Pacific market for U.S.
investors, with flows of US$4.2 billion.
Asia’s largest developed market remains
a particular favourite for core pan-Asian
funds run by U.S. investment managers.
“The Japanese allocation of these funds is
30 to 40 per cent because there are notthat many areas in these regions that canbe called core,” one Japan investor said.
“The funds are dollar based, so there is acurrency hedge when they invest in yen,and presently this hedge is a 2 per centpremium. They are aggressive becauseof the magic that leads to a 3 per cent–yielding Japanese asset becoming 5 percent when the hedge is added.”

Exhibit 2-4 Change in Capital Flows into Asian Markets, by Region
Until end-2019

Over next 5 years

6.54

Asia Pacific

6.70
5.50

Europe5.91
5.37

Americas

5.81
5.29

Middle East/Africa

1
Largedecline

5.76
2

3

4

5
6
Stay
the same

7

8

9
Large
increase

Source: Emerging Trends in Real Estate Asia Pacific 2019 survey.

Fundraising
The first quarter of 2018 was a record one for Asia Pacific real estate fundraising, with
US$9 billion of equity raised across 13 funds, according to fund industry analysts Preqin.
Much of this capital was committed to a single well-known opportunistic fund, in linewith a trend identified by Preqin showing the bulk of equity raised for real estate funds
in recent years migrating to the top 10 managers. At the same time, however, theCornell University/Hodes Weill 2018 Institutional Real Estate Allocations Monitor showed
increasing allocations towards real estate in general and more investors than everexpressing an interest in the Asia Pacific region.
Average target allocations to real estate increased to 10.4 per cent in 2018, according
to Preqin, up 30 basis points (bps) from 2017 and are up approximately 150 bps since2013. Nearly half (47 per cent) of the 208 investors surveyed said they planned to invest
in Asia, with 36 per cent saying they would invest in Australia. Interest in Australia remains
unchanged since 2016, while the percentage of investors interested in Asia has grownfrom 43 per cent in 2017.

Emerging Trends in Real Estate® Asia Pacific 201928

Chapter 2: Real Estate Capital Flows

Exhibit 2-5 Quarterly Asia Pacific–Focused Private Real Estate Fundraising (Q1 2013–Q4 2018)

Aggregate capital raised (US$billion)

Number of funds closed

30

9

27

8

24

7

21

6

18

5

15

4

12

3

9

2

6

1

3

0

Number of funds closed

Aggregate capital raised

10

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 TD
2013
2014
2015
2016
2017
2018

Source: Preqin.

Managers raising pan–Asia Pacific funds
say that most of their investors are U.S.
pension funds and endowments, followed
by Middle Eastern capital and European
pensions and insurance capital. Asia
Pacific investment, from institutions
and family offices, is relatively small but
growing.
One fund manager explained the investor
breakdown for his regional fund: “The mixof investors coming to Asia has broadened
and includes a number of relatively new
players from within Asia Pacific. U.S. andMiddle Eastern investors account for nearly
three quarters, with 15 per cent from Asia
Pacific and 10 per cent from Europe.”
Interviewees report that raising capital for
China-focused vehicles is now tougher
than getting institutional cash into panAsian funds, which typically invest mainly
in Japan and Australia. The recent trade
war between China and the United States
has exacerbated this problem, reinforcing
longstanding concerns over China’s evershrinking yields. In the words of one China
investment manager: “There is a higher risk
premium put on investment in China which
is not necessarily commensurate with thereturns available.”

29

Emerging Trends in Real Estate® Asia Pacific 2019

Exhibit 2-6 Time Horizon for Investing

2019

2018

2017

2016

2015

1–3 years

3–5 years

5–10 years

10-plus years

0

10

20

30

Source: Emerging Trends in Real Estate Asia Pacific 2019 survey.

40

50

Asian high-net-worth capital is hard to pin
down, but interviewees report growinginterest in real estate both within andoutside the Asia Pacific region from highnet-worth sources. One capital raiser
said: “We’re seeing family offices directly
putting capital into opportunistic strategies
because it gives them exposure to things
that they just can’t do themselves. We’realso seeing private banks raise meaningful
Asian family office capital for opportunistic
strategies around the world.”

also piling up in the Asia Pacific. Preqin
data currently show US$34 billion of dry
powder for the region—less than half the
US$70 billion available for Europe anda small fraction of the US$184 billion
available in North American markets.

Banks Becoming More
Cautious

Despite the volume of capital invested in the
Asia Pacific over the past decade, together
with improvements in transparency andeconomic outperformance, many investors
remain convinced risks remains higher thanin Western markets. One fund manager
noted: “It’s funny talking to our IR [investor
relations} people, who cover global pension
funds: the funds are much happier about
our European and U.S. activities, wherereturns are a lot lower than in Asia where a
lot more has been invested.”

Overall, while bank debt available for Asia
Pacific real estate investment remains
plentiful, interviewees report that lenders
have tightened lending terms. There are
currently few markets where banks areoverstretched, but lenders and regulators
are also beginning to apply the brakes.

One growing trend reported by managers is
the inclination for co-investment alongsidea fund, something particularly favoured byfamily offices and fund-of-funds investors.
Investing in the fund gives access, but coinvestment will offer more control and lower
fees.

A manager of one pan-Asia real estate
fund said: “Availability of debt is generally
good across the region. It has tightened inAustralia most dramatically, driven by theregulator and the big four’s exposure to
real estate. We are also seeing a little bitof tightening in Singapore and some otherplaces. Japanese lenders are getting a little
bit picky; the leverage and the cost haven’tchanged, but they are getting a little bit
pickier regarding sponsors and asset
profiles. But the banks are actually acting
relatively rationally; I would say the debt
market is actually the most rational of all
markets in response to this late cycle.”

Meanwhile, recent capital raising for Asia
Pacific real estate funds is adding to theregion’s existing pool of uninvested capital.
So-called dry powder is more of a problem
for European and U.S. real estate, but is

According to a Hong Kong–based debt
adviser: “Core CBD office will get debt allday, every day. The area the market hasconcerns about is where there’s somereversionary story or if the asset is notprime, or if it is retail. If there’s something
unusual about the asset, then you’reunlikely—unless it is a relationship deal—to
get debt from a mainstream bank.”
Australia’s “big four” lenders have been
gradually pulling back on commercial
real estate lending since 2016, andregulatory pressure means that this isunlikely to change. This has led to atightening of underwriting standards,
significant reductions in the leverageof loans, increases in loan pricing, andreduced availability. “It is definitely harderto get finance and there’s a range ofbank-imposed measures: in some cases,
they might have a restriction on a certain
area because of fears it is oversuppliedor because they feel overexposed to thatarea. The conditions on lending havebecome almost prohibitive, and banks inreality are not looking to do a great deal oflending,” says one Australian investor.
Japan, with interest rates close to zero anda large banking sector, still offers cheap
and plentiful debt, at least for prime assets.
However, while the megabanks remainkeen lenders, smaller regional banks arebeing relatively cautious, especially inthe wake of a recent scandal involving
fraudulent real estate lending at a local
bank.
In addition, while rates remain low on
paper, lending terms are tightening.
According to one Japanese-based fundmanager: “What’s happening is thatthe rates haven’t changed very much,

Exhibit 2-7 Change in Targeted Returns Compared with 2018
Significantly lower

Somewhat lower

Same

Somewhat higher

Significantly higher

Opportunistic
Distress
Value-add
Core-plus
Core
0%

20%

40%

60%

80%

100%

Source: Emerging Trends in Real Estate Asia Pacific 2019 survey.

Emerging Trends in Real Estate® Asia Pacific 201930

Chapter 2: Real Estate Capital Flows

but LTVs have. Everyone’s trying not tobump rates but basically lowering LTVs
to manage risks. So you’re still below
100 bps all in, but banks and some life
companies are now charging upfront fees
as opposed to none, and they’re also
offsetting some of the LTVs with an upfront
fee as well.”India has also experienced a pullback inbank lending in 2018. In what one local
consultant described as a “tumultuous”
period in the second half of the year,
the depreciation of the Indian rupee—
combined with declines in the local stock
market, uncertainties over international
interest rate movements, and the debt

defaults of a prominent local financecompany—resulted in “the availability ofdebt capital for real estate becoming very
scarce,” as banks moved to reassessmarket risk. This has had a knock-on
impact for local developers who have been
unable to refinance existing debt, withsometimes-calamitous consequences fortheir solvency.

Exhibit 2-8 Asia Pacific Indicative Financing Terms: Core Assets
Hong Kong

Seoul

Singapore

Shanghai (RMB)

SydneyTokyo

3-month interbank rate (%)

2.10

1.80

1.65

4.35*

1.95

0.05

Typical margin (bps)

80

150

100

1.3x

180

70

All in cost of debt (%) (variable)

2.90

3.30

2.65

5.65

3.75

0.75

Typical LVR (%)

40

40–60

40–60

30–40

40–55

50–70

Transactional yield (%)

2.7

4.5

3.6

3.3

4.6

2.9

Yields spread over debt cost (bps)

-20

120

95

-235

100

215

Cash-on-cash yield (%)

2.6

5.7

4.6

2.0

5.8

6.1

Interest coverage multiple

2.3

2.7

2.7

1.7

2.5

6.4

Note: Prime transactional yields for all markets (except equivalent yields for Australia and cap rate for United States), represent JLL’s “market view” based on
a combination of market evidence where available and a survey of expert opinion. Debt costs are based on investment-grade borrowers, core stabilised assets
fixed pricing on typical market maturities.
*China prime lending rate.
Source: JLL, as of October 2018.

New Lenders Still Emerging

Exhibit 2-9 Change in Availability of Debt and Equity FinanceNonbank financing is becoming an
increasingly popular option across theregion. According to one Hong Kong–based consultant: “Because banks areperceived to have let the side down insome markets and in other markets they
are perceived to be too highly regulated,
we’re noticing a lot more people going tosources other than banks to get debt.”
This trend is particularly evident inAustralia, where the pullback of the fourmain domestic banks from real estate
lending has opened up opportunities
for both smaller banks and nonbank
lenders, targeting in particular residential
development. It is estimated that each 1
per cent reduction in lending by the big
four banks leaves a gap of A$2.7 billion ofdebt funding.
Japanese lenders are also reported to be
more active in Australia, often lending toJapanese developers involved in Australian

31

Equity for financing or
new investment

5.58

Debt for refinancing or
new investment

5.31

Debt for development

5.05

1
Large
decline

2

3

4

5
6
Stay
the same

7

8

9
Large
increase

Source: Emerging Trends in Real Estate Asia Pacific 2019 survey.

projects. A report from JLL suggested
that Japanese banks in Australia would be
prepared to extend 10-year loans with aloan-to-value of up to 65 per cent. Some
respondents said that both French andChinese banks are also looking at lending
in Australia.
More significant has been the growthin Australia’s nonbank lending market.

Emerging Trends in Real Estate® Asia Pacific 2019

A number of platforms have recently
been created by investment managers,
superannuation funds, and insurers. One
Australian investor commented: “Overthe last 12 to 18 months, there’s beensignificant growth in the nonbank lending
sector. It’s basically pools of high-networth money pulled through investment
management firms. Super Fund money isthere, but I think it’s starting to withdraw,

too.” The type of debt finance on offer
varies, but the investor noted: “What we’refinding is there’s a reluctance to do any
mezzanine debt, so generally they’ll havea first-ranking mortgage and they’ll do a
blended debt. Mezzanine is ridiculously,
prohibitively, expensive [because] so many
people got burnt on mezz in the last cycle.”
Asia debt funds also have been growing
in popularity in the past 12 to 18 months,
simply because “a lot of the equity funds
can’t find equity plays, and anyway they
don’t want to at these prices; they’d rather
lend to someone else who is prepared to[buy]. I think they also see it as being a bit
more secure in terms of being a short-term investment—if you set up a five-year
fund, you’re really constrained in terms ofgoing in and out of big chunky properties;
whereas if you lend money for three or four
years, you know at the end of that period
you’re going get the money back because
the [buyer] has to refinance.”

Over the long term, another potential
source of alternative funding may comevia the tech sector, which in some regional
markets is beginning to roll out consumer
finance products. In particular, observers
have noted how quickly China’s largest
e-commerce companies have moved
to diversify into financial services, withsome also projecting development ofconsumer mortgage products. As one
property advisor commented: “In China
we use Alipay, ApplePay, and the like tobuy groceries and even [pay] utility bills
and rent. I think the next thing will be forthem to get into residential mortgages. Of
course, the issue then will be, when does
the government get involved and start
regulating?”

However, debt has so far proved a more
popular play in Western markets than in
the Asia Pacific region. Of the US$32 billion
raised for such vehicles globally in 2017,
according to Preqin, only US$1.47 billion
was raised for the Asia Pacific, with only
US$570 million raised for the region in thefirst half of 2018, Preqin reports.

Exhibit 2-10 Quarterly Asia Pacific–Focused Private Real Estate Debt Fundraising (Q1 2013–Q4 2018)

Aggregate capital raised (US$billion)

Number of funds closed

7

600

6

500

5

400

4

300

3

200

2

100

1

0

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2013
2014
2015
2016
2017
2018

Number of funds closed

Aggregate capital raised

700

0Source: Preqin.

Exhibit 2-11 Availability of Debt by Type of Lender: 2018, 2019 surveys

Nonbank institutions(insurers or pension funds)

6.22

Mezzanine lenders

6.16

Alternative lending platforms(e.g., peer-to-peer/
crowdfunding)

6.08

Sovereign wealth funds

5.94

Banks

5.60

1
2
Large
decline

3

4

5
6
Stay
the same

Mezzanine lenders

6.05

Debt funds

6.00

Nonbank institutions(insurers or pension funds)

5.99

Alternative lending platforms(e.g., peer-to-peer/crowdfunding)

5.84

Sovereign wealth funds

5.67

Banks

4.98

7

Source: Emerging Trends in Real Estate Asia Pacific 2019 survey.

8

9
Large
increase

12
Large
decline

3

4

5
6
Stay
the same

7

8

9
Large
increase

Source: Emerging Trends in Real Estate Asia Pacific 2018 survey.

Emerging Trends in Real Estate® Asia Pacific 201932

Chapter 2: Real Estate Capital Flows

Debt Opportunities in China
The real estate cycle in China has long
been regulated by the government, whichtends to step in when it feels the market—
particularly the residential market—is either
overheating or needs stimulus.
Since mid-2016, China’s policy to delever has reduced the availability of debt,
particularly nonbank finance, in order toimprove financial stability and reduce thenation’s overall debt-to-GDP ratio. Thisdeleveraging has squeezed a large numberof real estate developers, especially in theprivate sector.
One result of this is that Chinese developers
without access to offshore finance havebeen targeted by overseas private-equity
groups offering mezzanine loans. As such,private-equity real estate companies are
acting as lenders of last resort to local
developers. According to one privateequity player: “We’re funding residential
development projects in the satellite cities
of Tier 1 cities. The companies we aretalking to, in the past, were relatively small
by China standards. Now, they are billiondollar companies borrowing at mid-teensor higher interest rates who could haveborrowed at half that cost 12 to 18 months
ago.”This business relies on a regular cycle oftightening and loosening by the Chinese
authorities, but there are now early signs
the U.S./China trade war might end theopportunity, as China loosens domestic
credit policy to combat the effects of U.S.
tariffs on its exported goods. In October,the People’s Bank of China announced
it would cut the reserve requirement ratio
for most domestic banks by 100 bps inorder to support domestic liquidity, lower
financing costs, and stimulate growth. The
measure will inject some RMB750 billion(US$107 billion) into the economy, CBRE
research estimates.

Stress and Distress
As liquidity falls and banks regionally begin
to tighten lending terms, more stressed anddistressed assets are beginning to appear
on Asia Pacific markets. This is welcome
news for investors—not only because it

33

offers new opportunities for profit, but also
because it marks a return to a normalised(and fundamentally healthier) real estate
cycle.
China is one market where developers
are now feeling the pain. However,interviewees suggested that domestic
specialists in the sector would be most
likely to take advantage of any windfall.
China is predicted to have as much as
RMB85.5 billion (US$13.6 billion) in realestate nonperforming loans (NPLs) by theend of 2018, according to China Orient
Asset Management. Most likely, however,
the majority of these will end up on thebalance sheets of state-backed asset
management companies and sold to local
players, as has happened in previous
years.
As one locally based investment manager
said: “There are lots of people looking at
China NPLs because it’s a large-scale
opportunity. The really large managers are
set up for this and have acquired servicing
businesses in China. So far, though,it’s been slim pickings for international
investors—there hasn’t been the wave ofdeals people have expected.”
Even if NPL portfolios become available,
the manager does not believe that they
will offer easy profits. “China is a very big
market. Your NPL portfolio will be backed
by hundreds of assets, not particularly
located in one city or in one province.
And your service provider probably only
specialises in particular cities or provinces.
It will be very challenging work.”
Stress is emerging in other markets, too.
In Australia, for example, several Chinese
developers may now find themselves
unable to complete deals for land boughtin previous years. According to one local
developer, “I think the biggest issue overthe next eight to 12 months will be people
who have optioned-up sites. They’ll have
paid a call option in the event that they’ll
get a planning outcome, then they’ll startdevelopment within two years and settleon the land. But I think you’ll find a lot of
people in that position no longer havethe means to settle because of their own
rationing of finance. People will then come

Emerging Trends in Real Estate® Asia Pacific 2019

onto the market to step into other people’s
options—that will probably accelerate overthe next six to eight months.”
Japan is another market that intervieweescited as at risk—this time as a result of
an impending rise in consumption tax
coupled with a potential trade war should
the U.S. government follow through on
threats to impose tariffs on Japanese
autos. According to one Tokyo-based
investor: “Right now, I see a lot of cracks
out there and I don’t think it will take muchfor those to get wider. I think it’ll be before
the Olympics, because next year the
consumption tax is going to hurt and thechances of the USA coming after them on
auto tariffs is high. So [we have] to wait and
see what happens over the next 12 or 18
months.”Finally, developers in India also are
feeling the pain as banks tighten accessto credit. In particular, many mid-level
residential players are now gasping for
air as they seek to refinance debt. Withbanks unwilling to front more cash andwith access to the equities markets also
constrained by newly imposed regulatory
requirements, mid-tier developers may
be forced to divest land banks in order topay back loans. So far, however, foreign
investors have been slow to take the bait,although at least one major foreign player
has recently announced an intention to
pursue this theme. According to one
local adviser: “This is the time to put yourmegadollars to work—you could scoop up
the market if you have a smart team. But
because some had their fingers burned in
the past, they’re now being overcautious.
Anyway, as the political dust settles overthe next six to 12 months, there are going
to be a lot of opportunities.”

Bonds Lag as Beijing Tightens
Liquidity

A report from rating agency Moody’s
Investors Service said that the top 50 rated
developers will have about US$18.5 billion
of offshore bonds and US$36.9 billion of
onshore bonds maturing or becoming due
over the next 12 months. “Most of thesecompanies will have adequate liquidity
to meet their obligations given their cash
holdings, cash generation from property
sales, and our expectation that they will
maintain access to funding,” the reportsaid. However, refinancing risks are set
to increase for some small developers, as
their credit quality and subsequently theiraccess to funding will weaken as property
sales slow in the next 12 months.
The outlook for offshore bond issuancealso looks weak going forward. In
September, one local developer broke anunwanted record by issuing US$280 million
in 2.25-year bonds paying a 13.7 per centcoupon—a record for China bond issues
in 2018. Other developers are paying
considerably higher coupons in the second
half of 2018 compared with previous years.
According to JLL corporate finance, theaverage cost of offshore debt for Chinese
developers was 100 bps higher in mid2018 compared with the previous year.
That’s if they can get away new issues
at all. China’s National Development andReform Commission, which approves
corporate debt issuance, was reported tohave virtually stopped granting new quotas
for offshore bond sales since April 2018,

Onshore9

Offshore

8
7
US$billion

Developers are estimated to have US$23
billion of onshore and offshore bonds
to refinance in the first quarter of 2019
after sluggish bond sales since late2017. In summer 2018, a number oflarge developers pulled onshore bondissues, with observers blaming regulatory
pressures. However, the environment
improved quickly, and in August,developers managed to issue RMB42
billion (US$6 billion) of onshore bonds,
according to Bloomberg data.

10

6
5
4
3
2
1
0

Sept

Oct

Nov

Dec

Jan

Feb

Mar

2017

Apr

May

Jun

Jul

Aug

2018

Sources: Bloomberg, Wind, Moody’s Investors Service.

Exhibit 2-13 Rated China Developers Refinancing Needs

11
10

Onshore9

Offshore

8
7
US$billion

China property developers face arefinancing mountain in 2019 after a difficult
period for onshore and offshore bondissuance.

Exhibit 2-12 Bond Issuance by Rated China Property Developers

6
5
4
3
2
1
0

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

2019
Sources: Bloomberg, Wind, Moody’s Investors Service.

meaning that most offshore bond issues
since then have come from developers that
had not taken up full quotas granted earlier.
Onshore bond issuance is likely to be usedby some developers to refinance offshore
borrowing. Some analysts believe that
restrictions will be loosened in 2019, since
Beijing does not want swathes of insolvent

property developers any more than an
overheating residential market.
Since 2016, issuance of mortgage-backed
securities (MBS) has been on the rise in
China, generally through “quasi-REIT”
structures. DBS Real Estate estimatesthat RMB66 billion (US$9.5 billion) ofcommercial MBS were issued in 2016 andEmerging Trends in Real Estate® Asia Pacific 201934

Chapter 2: Real Estate Capital Flows

Meanwhile, China has been experimenting“quasi-REITs” for nearly two decades.
However, these vehicles have so far been
largely nonlisted and have also consistedof debt, rather than equity securitisations.
The Asia Pacific Real Estate Association
estimates that there are around 30 quasi-

35

Emerging Trends in Real Estate® Asia Pacific 2019

US-REIT

A-REIT (Australia)

S-REIT (Singapore)

350
300
250
200

Oct-18100

Oct-17150
Oct-16

In India, the market is still waiting for the
first REIT initial public offering (IPO), despite
the fact that the Securities and Exchange
Board introduced REIT legislation as long
ago as 2014. That said, a number of
REIT IPOs are in the pipeline, in particular
the landmark US$680 million offering byBlackstone Group and its Indian partner

J-REIT

Oct-15

Total market capitalisation of Asia Pacific
REITs is less than half that of the UnitedStates, though this gap will narrow when
China and India develop REIT markets.
Progress towards this has been glacial,
however.

Exhibit 2-14 Global REIT Comparison

Oct-14

Performance for the region’s threemajor REIT markets was in line withthe overall trend, with Singapore REITs
slightly underperforming the market. In
contrast, U.S. REITs have outperformed
considerably in recent years, unsurprisingly
given that U.S. growth has outstrippedthat in Asia REIT countries. According
to MSCI, Asian REIT yields average 4.24
per cent. Asian REITs spent US$10 billion
on acquisitions in the first half of 2018,according to CBRE research, in line with2017.

However, while Chinese government
support for the rental residential properties
has now driven significant capital into thesector from both Mainland and overseas
investors, the dynamics of China’s realestate market make it hard for the financesof a prospective C-REIT industry to stack
up. Yields for China investment properties
currently average just 2 to 3 per cent, well
below the cost of debt. At these levels,
China REITs would be unable to comeclose to the yields offered by peers aroundthe region unless the market was repriced.
In addition, China has yet to devise a legal
structure and tax framework for REITs thatwill satisfy prospective managers.

Oct-13

Asia Pacific REIT performance was modest
in the first nine months of 2018, with anine-month return of 1.89 per cent for the
MSCI AC Asia Pacific REITs Index, which
tracks both developed and developing
market REITs.

Oct-12

REITs

Still, as one interviewee put it: “One REIT
will not a market make.” So far, only one
other prospective Indian REIT has beenregistered, and property owners generally
are in no rush to securitise portfolios.
According to one Indian investor: “We’renever going to be first. We’re going wait,
and let this thing grow. Our portfolios are
doing really well. We could hold them foranother five or six years, and just clip very
high yields.”

Oct-11

Nonetheless, the bank believes “CMBS
can keep growing rapidly, given its simple
structure,” suggesting also that this would
be of more benefit to private companies
with low credit ratings and good-quality
assets.

One potential way to kick-start China’s
REIT sector may be via rapid growthin the residential rental platforms. The
government has now prioritised thecreation of a long-lease rental apartment
sector, providing investors a raft ofincentives, including land supply andtax incentives. In April 2018, the China
Securities Regulatory Commission andthe Housing Ministry issued a note
encouraging securitisation of rental
properties, stating that Beijing soon
intended to launch a pilot programme
for equity REITs.

The upcoming REIT is generally
considered to be both well subscribedand conservatively priced. It is targetinga 6.5 to 7 per cent yield, which on theface of it would create challenges in amarket where yields are usually significantly
higher. Interviewees expect, however, that
the REIT will be promoted as a growth
opportunity offering opportunity for asset
price growth.

Oct-10However, DBS believes these structures
do not offer much potential for foreign
buyers of real estate debt. Valuations for
China MBS have been very aggressive. In
addition, DBS describes China’s system ofcredit ratings as a “black box” and notesthat the interest coverage ratio for somebonds was scarcely above 1x.

REITs in existence. However, none ofthem resembles the REIT model familiar toinvestors around the world.

Embassy Group’s 33 million-square-footbusiness park portfolio, which will be Asia’s
largest REIT by gross floor area (GFA).
Originally slated to be launched in 2018,
the IPO is now expected in early 2019.

Oct-092017, while more than RMB200 billion(US$28.7 billion) of residential MBS were
issued from 2014 to 2017.

Note: Tokyo Stock Exchange REIT Index (J-REIT), FTSE NAREIT All Equity REITS Index (US-REIT),
S&P/ASX 200 A-REIT Index (A-REIT), FTSE ST REIT Index (S-REIT).
Sources: Bloomberg, DWS, as of October 2018.

Singapore
In the nine months to September 30, 2018,
the S&P REIT Index lost 1.2 per cent inlocal currency terms, although one-year
returns were still positive at 6.56 per cent.
However, relative to the wider Singapore
equity market (the main STI index returned–10 per cent in the same period), S-REIT
performance has been positive. The IPO
market has been quiet, although a few
S-REIT IPOs have been trialled.
Meanwhile, the US$448 million listing of
one new Singaporean REIT offering an
11-office portfolio in the United States
underlines a key emerging trend in the
S-REIT sector. The higher yields available
in the United States, Europe, and Australia
are attractive to Singaporean investors.

assets because usually they are tightly
held to a great extent, save for strata
and smaller spaces, which are not really
REIT-type purchases. Going forward, theoffshore push is where we are putting ouremphasis.”

lot of cases the pricing or the manager
is an obstacle. But REITs need to gain
scale quickly, so mergers should continue.
It goes without saying that it will benefit
Singapore for the REIT market to thin out
the ones that do not contribute.”

The Singapore REIT market has also begun
to see consolidation amongst smaller
REITs, the main driver being the need togain size and liquidity; broadly speaking, a
REIT needs market capitalisation of at least
S$1 billion in order to get on institutional
investors’ radars and generate liquidity inthe stock. Investors also hope that fewer
sponsors in the market will also meanstronger sponsors.

Japan

Smaller Singapore REITs have been trading
at substantial discounts to net asset value.
In principle, this ought to make acquisitions
easier. However, Singapore’s externalmanagement model makes the process
tougher, said one S-REIT manager.
“Several of the REITs do not have strong
enough sponsorship. However, there has
been a bit of a standoff, because we havean externally managed system, and in a

Higher offshore yields are also a factor
driving S-REITs to invest in other markets.
“REITs have been going offshore for awhile,” said one manager. “The availabilityof stock to be securitised here is limited,and people have reservations about sellingJapanese REITs have performed strongly in
2018, with the S&P Japanese REIT Index
returning 9.3 per cent and sponsors taking
advantage of the market to raise newequity.
Data from DWS show ¥364 billion(US$3.23 billion) of capital raised throughpublic offerings from J-REITs in the firsthalf of 2018 and ¥38 billion (US$3.4 billion)
raised via two IPOs. J-REITs remain an
attractive investment in Japan given thatthe spread between their average yieldof 4.1 per cent and yields for 10-year
government bonds was a healthy 404
basis points in June 2018. That comparesto just 126 bps for U.S.-based REITs.
J-REIT activity has also bounced back in
2018. With ¥1.024 trillion (US$9 billion)

Exhibit 2-15 Capital Raising and Transactions by REITs in Japan (6 months rolling average)

Equity0.7

Bond

Net acquisition by J-REITs

1.2

0.5

0.8

0.4
0.6
0.3
0.4

0.2

0.2

0.1
0.0

Net acquisition by J-REITs

1.0

2018.032018.09E

2017.092017.032016.09

2016.032015.09

2015.03

2014.09

2014.032013.09

2013.032012.09

2012.03

2011.09

2011.032010.09

2010.032009.09

2009.032008.09

2008.032007.09

2007.032006.09

2006.032005.09

2005.03

2004.09

2004.03

2003.09

2003.03

2002.09

0.0
2002.03

Figures in JPY tn

0.6

Sources: ARES, DWS, as of October 2018.

Emerging Trends in Real Estate® Asia Pacific 201936

Chapter 2: Real Estate Capital Flowsof acquisitions, J-REITs represented
some 57 per cent of all Japanese realestate transactions in the first half of2018. However, some observers of
J-REIT behaviour have been concernedby the ongoing use of short-term debt in
the industry, as well as recent patternsof buying and selling. One investor
commented that J-REITs have become
net sellers in the second half of 2018.
“They are selling off a bunch of properties
because their prices are high. We areseeing them selling low-yielding assets,
really core assets, and buying higheryielding properties such as regional or older
assets. These have very high cap rates,
but I would say they are not ‘REIT-able’
because of age and location.”
Nonetheless, interviewees involved in the
sector said that they were not changing
strategy and would continue to focus on
buying mature assets from their sponsors.

Australia
Office and logistics REITs in Australia havebeen the focus of fierce bids in the past 12
months, a reflection of the attractivenessof their underlying assets to international
capital.
The interest in A-REITs from overseas
investors comes because recent weakness
in the Australian dollar makes themcheaper in U.S. dollar terms and because
they offer an otherwise rare opportunity
to acquire portfolios of prime Australianassets. Merger offers are also being driven
by A-REITs’ inability to buy new assets inthe open market. Those trading at small
premiums or discounts to net asset value
will be most prone to approaches fromforeign investors or their listed peers.
Despite the merger-and-acquisition (M&A)
excitement, performance for the sector has
been weak in 2018, with the S&P Australia
REIT Index down 2.2 per cent in the ninemonths to September 2018, marginally
underperforming the wider real estateindex (–1.3 per cent) and the S&P ASX 200(–2.07 per cent). Investors have become
focused on the narrowing spread between

37

domestic 10-year bond yields and the
A-REIT dividend yield, which had narrowed
to 178 bps by the end of September 2018,
having been above 200 bps earlier in theyear.
One Australian investor believed that
A-REITs could be beneficiaries of a future
downturn in the market due to the strengthof their balance sheets. “A-REITs are all
trading well. If you look at the average
REIT now compared to the GFC [global
financial crisis], the average REIT [then] wasprobably trading at a 18x multiple and had
gearing of 50 per cent. The average REIT
now is trading at a 10 to 12x multiple andhas gearing of 20 per cent. So they’re allvery low geared—in fact, most of them are
set up for opportunity should opportunity
arise—and if the market does start to falland overseas institutions drop out, they’rein a good position to buy.”

Hong Kong
Hong Kong is known for its dynamic realestate market, but not for the vitality of
its REIT sector. Apart from one very large
REIT—the largest and only internallymanaged REIT in the Asia Pacific region—
the Hong Kong REIT sector has seen little
excitement since the first REITs appearedin 2005.
Nonetheless, in line with rising values in
the city, Hong Kong REITs returned 6.7
per cent in the nine months to September
2018, according to S&P, although thesector is trading at a hefty 40 per centdiscount to net asset value. Furthermore,
it recently registered its first-ever hostilebid, with one fund manager seeking totake over a Hong Kong–listed REIT holding
assets in the United Kingdom and China.
Further M&A activity is unlikely given that
other externally managed Hong Kong
REITs have strong sponsors unlikely tocooperate.
Managers complain that the Hong Kong
REIT code lags Singapore in both flexibility
and investor-friendliness, and that this has
hampered the launch of new REITs. This is

Emerging Trends in Real Estate® Asia Pacific 2019supported by the fact that since Link REIT
floated in 2005, Hong Kong has seen just
10 further REIT IPOs, while Singapore—
which saw its first REIT IPO in 2002—now
has some 50 listed trusts.

Chapter 3: Markets and Sectors to Watch“Moving to value-add is a great strategy—you can stay on the risk spectrum
in a city that you already know and do something a little more interesting.”
Asia’s markets today are increasingly
bifurcated, with hard-core core investors
continuing to chase flagship office buildings
they know are highly if not fully priced. The
lack of easy targets is pushing investors
and developers with flexible mandates intovalue-add and opportunistic strategies, aswell as secondary markets.
Office space has long been the asset
class of choice for investors across Asia.
However, industrial and distribution space
are almost equally as popular, as modern
warehouse and logistics facilities roll out
around the region, driven by the relentlessrise of e-commerce.

Shanghai and Shenzhen still looks good.
Foreign funds with a mandate to invest in
China in order to diversify their global realestate holdings are still buyers, and themarket is backstopped by huge amountsof domestic liquidity, with local insurancecompanies in particular continuing to build
portfolios and likely to remain active buyers
for years to come.
Most interviewees cite India as a current
opportunity or a market they would liketo enter, although for now the foreign
investment base consists mainly of big
institutional players in the game for the“Logistics continues to be the flavour ofthe day, month, year. Whatever you wantto say, it continues to be the standout
opportunity,” one commercial broker says.
It’s worth noting that four of the top fivecities in our investment prospects rankings(those in Australia and Japan) share two
important characteristics: they provide agood yield spread over the cost of debt
and/or sovereign bonds, and they offer
deep, liquid, and mature core markets,
where investors can take a measure of
comfort that assets will continue to tradeand yields will remain healthy even during
a downturn. The other member of the
top five—Singapore—offers these samefeatures up to a point, but its appearance
in the number-two position is more an
indication of its status as a countercyclicalplay, with investors looking for further
gains after its markets bottomed last year.
Singapore office looks set for rental growthover the coming year.
Otherwise, rising rates, tighter credit, andtrade-war tensions have forced investment
rankings lower for all Chinese cities
considered in the 2019 survey. However,on the proviso you can secure land anda strong local partner, development inlong run and unconcerned about potential
short-term volatility. This year, Indian retailand industrial/logistics assets are higher up
the shopping list than office space.
Ho Chi Minh City, meanwhile, continues
to be the top emerging market, and isparticularly strong in the development
stakes, ranking second behind only
Melbourne. It is also the hottest market for
acquisitions in virtually every sector: office,retail, and residential, while second behind
only 2020 Olympics host Tokyofor hotels.

Exhibit 3-1 City Investment
Prospects, 2019

Generally poor

Fair

Exhibit 3-2 City Development
Prospects, 2019

Generally good

Generally poor

Fair

Generally good1
2
3

Melbourne
Singapore
Sydney

5.89
5.88
5.87

1
2
3

Melbourne
Ho Chi Minh City
Sydney

5.79
5.72
5.69

4
5
6
7
8

Tokyo
Osaka
Shanghai
Ho Chi Minh City
Shenzhen

5.86
5.70
5.70
5.69
5.46

4
5
6
7
8

Tokyo
Shanghai
Osaka
Shenzhen
Singapore

5.67
5.53
5.52
5.50
5.48

9
10

Seoul
Guangzhou

5.44
5.33

9
10

MumbaiBangkok

5.38
5.29

11
12
13
14
15
16
17
18
19

BangkokBeijing
MumbaiHong Kong
JakartaBangalore
New Delhi
China – second-tier cities
Manila

5.30
5.23
5.23
5.16
5.09
5.05
5.03
5.01
4.99

11
12
13
14
15
16
17
18
19

Guangzhou
Seoul
New Delhi
Bangalore
JakartaBeijing
China – second-tier cities
Hong Kong
Manila

5.23
5.22
5.19
5.14
5.14
5.10
5.06
5.03
5.03

20
21
22

Auckland
Taipei
Kuala Lumpur

4.97
4.90
4.89

20
21
22

TaipeiAuckland
Kuala Lumpur

4.99
4.98
4.90

Source: Emerging Trends in Real Estate
Asia Pacific 2019 survey.

Source: Emerging Trends in Real Estate
Asia Pacific 2019 survey.

Emerging Trends in Real Estate® Asia Pacific 201938

Leading Buy/Hold/Sell Recommendations
OfficeBuy Ho Chi Minh City and Tokyo
Sell Taipei and Auckland
RetailBuy Ho Chi Minh City and Bangalore
Sell Kuala Lumpur and Auckland
Residential
Buy Ho Chi Minh City and Mumbai
Sell Taipei and Kuala Lumpur
Industrial/distribution
Buy Bangalore and Mumbai
Sell Taipei and Kuala Lumpur
HotelsBuy Tokyo and Ho Chi Minh City
Sell Taipei and Beijing

Exhibit 3-3 Historical Investment Prospect Rankings
2019 2018 2017 2016 2015 2014 2013 2012 2011 2010
Melbourne

1

2

16

3

5

13

10

7

9

9

Singapore

2

3

21

11

9

7

3

1

1

5

Sydney

3

1

9

2

4

5

4

3

6

6

Tokyo

4

7

12

1

1

1

13

16

12

7

Osaka

5

10

15

4

3

9

22

21

19

18

Shanghai

6

4

6

9

6

2

2

2

2

1

Ho Chi Minh City

7

5

4

5

13

19

18

10

11

13

Shenzhen

8

6

5

18

19

10

16

-

-

-

Seoul

9

19

17

7

7

15

14

19

16

4

Guangzhou

10

8

10

20

20

6

15

6

8

12

Bangkok

11

16

8

19

16

11

6

14

17

19

Beijing

12

11

11

14

10

8

7

5

7

3

Mumbai

13

12

2

13

11

22

20

15

3

8

Hong Kong

14

13

18

15

21

18

11

13

4

2

Jakarta

15

14

7

6

2

3

1

11

14

17

Bangalore

16

15

1

12

17

20

19

9

10

14

New Delhi

17

20

13

16

14

21

21

12

5

10

China – second-tier cities 18

17

20

22

22

12

8

-

-

-

Manila

19

18

3

8

8

4

12

18

20

20

Auckland

20

9

14

10

15

17

17

20

18

16

Taipei

21

22

22

17

18

16

9

8

13

11

Kuala Lumpur

22

21

19

21

12

14

5

17

15

15

Source: Emerging Trends in Real Estate Asia Pacific surveys.
Note: — = no data.

39

Emerging Trends in Real Estate® Asia Pacific 2019

Top Five

Markets
TOKYO

4

Tokyo’s move up to fourth reflects what has always
made it a favourite for institutional buyers: cheap finance,
attractive leverage, a good spread over interest rates, anda large stock of investment-grade assets.

5
OSAKA
Slightly higher yields in Japanese secondary
destinations have appeal for those stopped out ofopportunities in the nation’s capital

2
SINGAPORE
Sentiment for commercial
property continues to improveas the market rebounds fromcyclical lows.

SYDNEYMELBOURNE

1

Offers a constrained office supply pipeline; a goodyield spread over the cost of debt and sovereign
bonds; a deep, liquid, core market; and good prospects
for rental growth.

3

Still a favourite of global investors
due to relatively high returns and asa safe-haven play. Buyer competition
helps sustain pricing, while low
vacancies and growing demandsuggest rents will continue to rise.

Emerging Trends in Real Estate® Asia Pacific 201940

Chapter 3: Markets and Sectors to Watch

Top Investment Cities
Melbourne (first in investment, first in
development). Used to playing second
fiddle to Sydney, Melbourne this year
narrowly outstrips it in our 2019 survey as
the best prospect in the Asia Pacific region
for both investment and development.
Apart from reasons already set out above,
another factor in Melbourne’s assent in
the rankings is that, unlike Sydney, its
office supply pipeline is constrained. Withvacancies shrinking rapidly, this is likely toprovide upward momentum to rents.
During 2018, rental growth has been
“phenomenal” in both cities. Yields havecompressed but are still attractive byinternational standards, running around
4.5 per cent for prime office or prime retail,and 5.5 per cent for good industrial space.
Prices are slightly more reasonable in
Melbourne, again explaining the shift in thecenter of attention.
Both Australian cities are core markets atheart, but with the number of investableassets significantly lower than in Japan
there is strong competition to place capital,
especially with so many international
players looking to buy. Logistics and bigbox retail also have their fans, but investors
are wary of the “barbell effect” in which
only dominant regional malls and specialty
local retail space win at the expense of
mid-market and neighbourhood shopping
centres.
Investment
prospects

Development
prospects

8 GOOD
7
5.89

6

5.79

5
4 FAIR3
2
10

Melbourne
POOR’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19

The surge in interest from Chinese
developers and investors has disappearedin 2018 as Beijing clamped down on
overseas purchases. Chinese transaction

41

volume in Australia shrank 60 per cent in2017, according to Cushman & Wakefield,
and has only continued to fall in 2018.
At the same time, though, U.S. pension
funds have increased their allocations, andpressure seems set to continue given thatJapanese pension funds and insurancecompanies have newly started to allocate
to overseas real estate. Although their initial
focus will probably be primarily on markets
in the West, Australia is likely to be oneof the first ports of call in the Asia Pacificregion.
Melbourne is actually the weakest market
in Australia when it comes to residential
property, with home prices turning downin January and falling all year. They were
off 4.9 per cent for 2018 through October,according to CoreLogic, a real estate data
provider. The fall in home prices is largelya result of the tightening of bank credit for
both developers and consumers, reflecting
concern among both regulators andAustralia’s big four banks that the market
has become overheated. Over the longterm, however, ongoing migration patterns
are a positive for residential real estate, so
a prolonged downturn seems unlikely.

The residential market has been
exceptionally resilient, despite coolingmeasures being in place for several years.
Investment
prospects

Development
prospects

8 GOOD
7
6

5.88

5

5.48

AIR
4 FA

3

Singapore

2
1
0

POOR

’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19

In response to increasing prices, theSingapore government imposed further
regulatory cooling steps in July 2018,
which slowed the market to a crawl in thefollowing months. Over the next 12 months
the outlook for the residential market
remains clouded as both developers andhomebuyers have become more cautious
as a result of the government tightening
policies.

Singapore (second in investment,eighth in development). The
improvement in Singapore’s office market
has seen the city-state comprehensively
rerated by respondents, after falling to 21stplace in our 2017 report.

Meanwhile, rents and yields for prime
retail space have been firming across thecity after years of poor performance as
Singapore landlords struggle to adapt to
new models of retailing. Solid economic
growth and high visitor numbers havesupported the market in 2018.

Office rents have been rising strongly
since then due to a lack of supply andrebounding demand from tenants. Coworking and other flexible office space
operators have become amongst thebiggest leasers of office space, while techfirms have also been active in the market.

The logistics market continues to beplagued with oversupply, which has
suppressed rents, but there are signs that
excess space is now being taken up, andrents are predicted to improve slightly in
2019.

A number of major office deals havebeen sealed in the past 12 months, withdomestic investors the biggest buyers.
However, one fund manager active in themarket says: “It is possible the market isoverly bullish towards the office sector,
as 2019 could be a challenging year for
the Singapore economy and new supply
is expected in 2020 and 2021.” While
the CBD will see no supply until 2020,
decentralised office markets will see new
office openings next year.

Emerging Trends in Real Estate® Asia Pacific 2019

Sydney (third in investment, third indevelopment). Office vacancies are low
in both Sydney and Melbourne, runningaround 4 per cent. Only Hong Kong’s
downtown Central district and major cities
in Japan now have tighter commercial
markets in the Asia Pacific region.
Meanwhile, rental growth at an annual paceof 20 per cent or more in Sydney has beenremarkable.
While Sydney is Australia’s largest officeInvestment
prospects

Development
prospects

8 GOOD
7
5.87

6

5.69

5
4 FAIR
3

Sydney

2
1
0

POOR

’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19

market, it is also the default option forboth domestic and international investors,
meaning far more capital is chasing assets
than the market can accommodate. Higher
institutional allocations to real estate
inevitably mean portfolio managers put
Sydney on their destination list. A JLL
estimate suggests there is A$6.30 of capitalchasing every A$1.0 of Australian officeproduct, with the Sydney office market
accounting for 55 per cent of institutionaltransactions nationwide.
Sydney’s office market, dominated by
the big four banks and other financials, isdiversifying. Big tech firms are moving in,with Amazon.com’s Australian headquarters
occupying space previously taken by
Commonwealth Bank, Allianz, and Caltex.
It has generally older office stock thanin Melbourne, which is encouraging theredevelopment of aged buildings with acentral location. Blocks that were tall at
18 or so floors in the 1960s are now being
demolished and rebuilt at double the height.
There’s repurposing, too, with plenty ofoffice towers converted into apartments—
and at least one residential tower is being
retained as the core of a “new” officeskyscraper.
Home prices have fallen for more than ayear in Sydney. Housing remains some of
the least affordable on the planet, and ischaracterised by a strange dynamic in which
the city is growing in absolute population
due to immigration and internal migration,
but seeing a loss in the population of localborn Sydneysiders moving to the suburbs orto other cities in search of larger, affordable
homes.

Tokyo (fourth in investment, fourthin development). Investors last year
suggested Tokyo might be running out
of gas, but its rise in the rankings in thisyear’s survey suggests that buyers are
not deterred. While assets are keenly
priced, for many large institutional funds
the city has enduring appeal, offering
by far the largest number of investableproperties, together with cheap finance,
attractive leverage, and rising rents. For
an institutional fund manager looking for
reliable yield and a safe place to park
funds, Tokyo ticks all the boxes.

the Olympics are a two-week event. We’reeven hearing some hotel development
projects that were on the board are now
being scrapped.”

High prices are forcing prospective buyers
to pay a lot more attention to specific ward
and location within Tokyo, with more focus
this year on B-grade assets that offer someroom for asset management enhancement
together with a lower rental threshold thatmeans it will always to be able to draw
tenants.
Investment
prospects

Development
prospects

8 GOOD

Shanghai (fifth in investment, fifth indevelopment). Shanghai, as the mostliquid of the Mainland Chinese markets,always presents trading and investment
opportunities no matter how tight themarket. Despite some Shanghai officeassets trading at cash yields of 4 per centor less, the city is also first port of call forforeign investors seeking core assets as ameans of diversifying their global portfolios.
Given that local insurers flush with cash
continue to plough capital into the top
end of the market, cap rates promise tocontinue to trend downwards.
Given high prices in city-centre locations,
opportunistic foreign investors continue tolook at possibilities in noncentral locations.
Value-add is also a theme now becoming
increasingly popular in Shanghai, although
anecdotally such projects have proved
difficult to pursue.

7
6

5.86

5

5.67

4 FAIR

Investment
prospects

Development
prospects

8 GOOD
7

Tokyo

3

6

5.70

2

5

5.53

1
0

AIR
4 FAIRPOOR’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19

Last year’s focus on the residential sector
market appears now to have faded aftercap rates fell sharply and the supply ofavailable assets dried up. Logistics space
is another popular play, either purchasing
portfolios or looking to develop individual
facilities, particularly in build-to-suitsituations.
Interest in hotels, whether high-end or
three-star, has been intense in the runup to the 2020 Olympics, but the bloom
appears now to have come off. According
to one locally based fund manager: “We’rehearing hotels are about to come forsale, whereas before people were trying
to buy them aggressively because of the
Olympics—now they’re finally realising that3

Shanghai

2
1
0

POOR

’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19

China’s attempts to deleverage its
economy saw credit hard to come bythroughout 2018, with banks given
guidance not to lend for acquisitions ofreal estate in the first half of the year.
Further restrictions have been applied tooverseas and local bond sales, as well as
the ability to buy project companies thatown land. That has hit Tier 2 and Tier 3
cities particularly hard, although it remains
tough to come by money for investment
in Shanghai and other Tier 1 cities, too.
The resultant squeeze on developer
finances opens up new opportunities for

Emerging Trends in Real Estate® Asia Pacific 201942

Chapter 3: Markets and Sectors to Watch

foreign investors, either by providing debt
or potentially by participating in distresssituations, although historically this has notbeen a fruitful exercise for foreign capitalin China.
Towards the end of 2018, there were signs
that Shanghai was turning the taps backon with credit in response to the gathering
trade war with the United States. Should
the Chinese economy enter a deep or
prolonged downturn, real estate is likely tobenefit from further credit easing.
Osaka (sixth in investment, sixth indevelopment). The lack of reasonably
priced core assets in Tokyo continues topush investors into regional Japan, where
local economies are now more mature,providing some assurance to investors
that liquidity will not drop off in the event ofa correction. Osaka, as Japan’s secondlargest city, continues to be popular. One
head of Japan real estate says that while
office rents in Tokyo are approaching 11
o’clock, they’re still only at 8:30 a.m. in
Osaka and other regional cities.
Investment
prospects

Development
prospects

8 GOOD
7
6

5.70

5

5.52

4 FAIR

1
0

Osaka
POOR

’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19

With office cap rates at some 4.5 per cent(compared to sub–4 per cent in Tokyo),yields still have room to run, especiallygiven that rents in Osaka remain low.
With supply lacking, the city is probably
the top market beyond the capital. On
the residential side, cap rates in Osaka
have compressed to below 4 per cent, atwhich point they now sit at similar levels toresidential yields Tokyo. Although recent
wage rises across Japan have given aboost to residential rents, a likely increasein the consumption tax to 10 per cent willprobably end prospects for any further rent

43

Osaka remains a very tight market—there
are fewer sellers of office and residential
assets than just about anywhere in Asia,
according to the survey. Not surprising,then, that transaction volume is a fractionof that in Tokyo, similar to Guangzhou in
China.
Office vacancy rates are the lowest in
Asia for all of Japan’s secondary markets.
Osaka and also Nagoya, Yokohama, andFukuoka have very little space available,
and little on the way, either. However,prices of office assets in these destinations
are now high and provide little relative value
compared with those in Tokyo, according
to one investor.
Ho Chi Minh (seventh in investment,
second in development). Vietnam’s
biggest city and business capital continues
to rate as the most-attractive emerging
market destination for investmentand (especially) for development. The
population is young, incomes are on
the rise, and growth is forecast at anannual 6.6 per cent for each of the next
three years by Standard & Poor’s. For
opportunistic investors, there are plenty ofplays.
Investment
prospects

The Vietnamese government encourages
foreign investment, and imposes fewer
barriers to foreign participation in the realestate sector than other Southeast Asiandeveloping markets. Foreign capital issupplemented by the reshoring of money
by Viet Kieu, the overseas Vietnamese
population. Finally, Vietnam has always
been a strong tourism destination, andis witnessing a boom in visitors fromneighbouring China, leading to extensive
hotel development along the coast.
Shenzhen (eighth in investment,
seventh in development). The growth of
the tech sector has turned Shenzhen into
China’s Silicon Valley, which has drawn
startups and the venture capital chasing
them. Incomes are higher than anywherein China, drawing ambitious university
graduates, and decent office space is at apremium. That all bodes well for the longterm prospects for Shenzhen property.
Investment
prospects

6

5.69

5

5.72

4 FAIR

6

5.46

5

5.50

AIR
4 FAI

3
2

3

1

2

Ho Chi Minh City

1

Development
prospects

7

70

has great potential. There is basically no
logistics space countrywide that’s up tointernational standards, but this is a sector
investors are watching since there’s also
little indication that the economics workfor the rents such facilities would charge at
this stage.

8 GOOD

Development
prospects

8 GOOD

3
2

rises and prove a drag on the sector going
forward.

0

Shenzhen

POOR

’13

’14

’15

’16

’17

’18

’19

POOR

’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19

Incomes are three times the national
average, so housing affordability is muchhigher, encouraging aggressive investors totarget mass-market, middle-class homes.
Modern office space is in short supply, too,leaving rents far higher than, for instance,
Bangkok, and encouraging investment into
commercial property, which investors say

Emerging Trends in Real Estate® Asia Pacific 2019

Recently, official influence over the property
market has also been higher here thananywhere in the country.
Developers are showing increased pricesensitivity when it comes to their landbanks, bidding only on attractively priced
lots. The government is loath to opencommercial land to public bidding andhas preferred to tailor-make auctions forcompanies that agree to put a specificoperation in place.
The project of branding the Pearl River
Delta as the “Greater Bay Area” hasbeen aided by infrastructure such as the
Guangzhou-Shenzhen-Hong Kong Express
Rail Link and the Hong Kong-ZhuhaiMacau Bridge, which both opened in thesecond half of 2018. The bridge improves
access to factories in the less-developed
western side of the Pearl River Delta,
driving up prices for raw land.
Seoul (ninth in investment, 12th indevelopment). The Korean capital is aseller’s market, with new office buildings in
hot demand. Core commercial assets cansell at yields of 4 per cent to 5 per cent,with a line of buyers in wait. The shortageof core opportunities is prompting someinternational interest in core-plus and valueadd space.
Investment
prospects

Development
prospects

industry matures and becomes more
institutionalised. Slow growth in jobs andthe very strong growth in e-commerce
make retail challenging as an investment,
particularly on high streets, while geopoliticalconcerns and tensions with China havemade the performance of tourist-focusedreal estate assets wildly unpredictable.

Bangkok (11th in investment, 10th indevelopment). The occasional military
coup does not seem to derail the Thai
economy or frighten tourists, but it does
tend to discourage cross-border real estate
investors. That said, the city has risen in
popularity this year and remains one ofAsia’s most vibrant and liveable cities.

Guangzhou (10th in investment,
11th in development). The lack oftransactions available in prime locations
has forced investors into decentralised
deals if they want to do business inGuangzhou. It’s a relatively active market
overall, comparable in trading volume to
Beijing. Office dominates the conversation,although there’s also been interest in enbloc retail deals for malls with potential forrepositioning and improvement in thetenant mix.

Bangkok is also set to benefit from a hugewave of infrastructure investment, which is
expected to transform public transport andopen up a number of new locations for realestate investment and development.
Low vacancy and limited new supply of
office space are creating a market biased
in favour of landlords. Office rents climbed
9 per cent in the 12 months to June 31,
2018, with solid demand from the financial
services and fast-moving consumer goods(FMCG) sectors. Less than 250,000 square
metres is due to be added to office stockby 2023, only 5 per cent of existing space.

Investment
prospects

8Development
prospects

GOOD

Investment
prospects

8 GOOD

7

7

6

5.33

5

7

5.23

6

6

5.44

4

5

5.22

4 FAIR
3

Seoul

1

0

POOR

’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19

Office transaction activity is running at arecord rate, with some of Korea’s chaebol
conglomerates selling properties for the
first time, having been long-term landlords.
Owner/occupiers have also been willing tomonetise real estate holdings. The Bankof Korea nudged them along by starting toraise rates, slowly, at the end of 2017 after
six years of stasis. That has opened thedoor to European, North American, andintra-Asian buyers.
Korea’s strong showing as an exporter
also rewards investors willing to lookbeyond office into the logistics space.
There are multiple large, modern facilities
in the development pipeline as the

FA
AIR

5.30

5
4 FAIR

2

2

0

8 GOOD

3

1

Development
prospects

Guangzhou

Bangkok

5.29

3

POOR

2

’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19

The opening up of the greater Pearl River
Delta area should provide opportunity for
aggressive investors willing to move into
the western portion of the delta. That area
has long been a backwater comparedwith the lightning-fast development of theeastern delta region through Shenzhen
and Hong Kong, where real estate is
fast becoming too expensive to justify
industrial uses anymore. Guangzhou is at
the pinnacle of the entire delta, and set tobenefit whichever way development goes.
As in Shenzhen, developers are nervously
waiting to see if the government will put
into action its proposal to bar presales on
off-plan apartments. Metro-line extensions
and road improvements are opening up
suburbs that are being claimed into asprawling metropolis.

1
0

POOR

’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19

Retail, on the other hand, is seeing
substantial new supply, with close to700,000 square metres slated for 2018
alone. Nonetheless rents have risen, albeit
marginally, in the 12 months to mid-2018,with demand supported by increased
visitor numbers.
There is a growing population of
professional expats in Bangkok that is
supporting growth in the city’s serviced
office market. Increased visitor numbers
means the hotel sector has performed well,with stock expected to increase by 27 percent by 2023.
New residential supply was high in 2017,
slowing the market somewhat andEmerging Trends in Real Estate® Asia Pacific 201944

Chapter 3: Markets and Sectors to Watch

prompting developers to delay launch of
new projects. They are also increasingly
targeting foreign buyers, as residents
from Hong Kong and Singapore look forcheaper cities to invest savings.
Beijing (12th in investment, 16th indevelopment). The Chinese capital has
few land lots left for purchase in prime
parts of the city, though plots that do cometo market tend to attract plenty of bidders.
The Beijing government has effectively
shut down new development opportunities
within the third and fourth ring roads,
pushing developers into the far suburbs
to do business. This makes it “very hardto access opportunities that make sense,”
one developer said.
Investment
prospects

Development
prospects

8 GOOD
7
6

5.23

5

Beijing

5.10

R
4 FAIR

3
2
1
0

POOR

’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19

The Beijing government’s delayed
response to the initiation of a trade war
with the United States has made large
Chinese companies reticent to purchase.
Uncertainty over future constraints onexports has in some cases put office
expansion plans on hold, while slowing
Chinese growth is in some cases forcing
corporate consolidations.
Several older hotels are currently being
redeveloped into office towers. Retailspace in the capital has also been trading
actively. Tight credit has meant “cashis king,” and has made foreign partners
more popular than they were in a market
previously dominated by locals.

Mumbai (13th in investment, ninth indevelopment). As more of a financial
hub than a technology centre, Mumbai’s
office market is less oriented towards IT-

45

led business parks and special economic
zones than is the case in Bangalore andDelhi. Still, India’s rapidly growing capital
markets mean demand for high-quality
offices is booming in Mumbai, so despite
apparently high vacancies, ongoingshortages of modern office stock mean
new supply tends to be absorbed quickly.
Activity is not confined to the CBD, withstrong leasing momentum also surfacing
in fringe areas. As in other Asia Pacificmarkets, Mumbai is seeing strong growthin coworking assets. In fact, according to
one local consultant, “almost 15 per centof office space absorption across large
cities in India is now accounted for by coworking operators”.
There is also significant activity in Mumbai’s
retail sector. Although high-end malls
continue to perform well if properly
managed, mid-tier facilities are in general
poorly positioned and often unprofitablegiven that increasing numbers of Indian
consumers are migrating online. Somemalls are therefore attempting to revive
their businesses by buying back strata
space sold in previous years, vacating
malls and then refurbishing to create
more experiential environments. These
efforts follow the example set by somelarge foreign asset managers who in thelast 18 months have partnered with local
developers with the intention of revamping
well-located but poorly performing assets
in retail portfolios across the country.
Investment
prospects

Development
prospects

8 GOOD
7
6

5.23

5

5.38

4 FAIR
3

Mumbai

2
1
0

POOR

’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19

Hong Kong (14th in investment, 18th
in development). Hong Kong is the mostexpensive real estate market in the world,with residential and office values at theirhighest-ever levels and retail space that is

Emerging Trends in Real Estate® Asia Pacific 2019

Investment
prospects

Development
prospects

8 GOOD
7
6

5.16

5

5.03

AIR
4 FA

3
2
1
0

POOR

Hong Kong’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19

still expensive despite two years of falling
rents and values.
High prices make it hard for investors to
get the underwriting to add up, but there
is a core of regional and international
investors that has been active throughout
the current cycle, either carefully timing
strata office acquisitions or taking on valueadd office, retail, and mixed-use projects.
One such fund manager said that despite
rocketing prices, “Hong Kong cap rates
are no lower now than they have been
since any time in the last 10 years, since
the global financial crisis,” making the casefor adding value through refurbishment
and repositioning. While Hong Kong’s
prime Central offices are tightly held andattracting world-record rents, the city has
a seemingly inexhaustible supply of B- andC-grade offices ripe for improvement.
At the top of the market, Mainland China
financial services companies continue
to move to Hong Kong and to demand
the best space, while multinationals
find themselves moving to fringe ordecentralised areas. Coworking operators,
both international and home grown, arealso taking more office space.
Given their lower profitability, a numberof hotels are now being converted to
office space. Some hotels are also being
converted to co-living spaces for students
or young professionals.
The retail sector appears to be bottoming
after two years of plummeting rents andvalues, and a number of foreign privateequity investors have already bought into
the recovery. Rents are not yet rising,
however, and it remains to be seen if
Mainland spending will support the city’s
many luxury brands.
There are growing signs of weakness in theresidential market, with developers cutting
asking prices of new launches. However,underlying demand remains strong in themass market. The U.S.-China trade war
might subdue appetite for super-luxury
properties in the short term.
Jakarta (15th in investment, 15th indevelopment). A fourth year of record
new supply in the Jakarta office sector
continues to depress fundamentals. Whilethe higher quality of new supply means it
will usually draw tenants (with coworking
operators especially active), the impact
overall is strongly negative, with officevacancies approaching an extraordinary 35
per cent in mid-2018, according to JLL. As
a result, Jakarta is the only major city in the
Asia Pacific to see significant declines incapital values and rents in the year to mid2018, continuing a trend in place since thebeginning of 2015. In addition, there is little
activity in trading of stabilised assets. Not
only is the market generally tightly held, but
local owners are reluctant to take a haircut
on values even if declining rents and capitalvalues imply they should.
Investment
prospects

Development
prospects

8 GOOD
7
6

5.09

5

5.14

R
4 FAIR

3

Jakarta

2
1
0

POOR

’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19

Residential markets are also suffering fromoversupply, especially at the top end, andtransactions remain soft. A healthy market
has sprung up in the affordable housing
sector, however, with strong demand andconstruction of new supply booming. With
the moratorium on new retail supply stillin place, there is little activity in this sector

either, resulting in a quiet market all round.
Private-equity investors continue to showinterest in Indonesia, however, and arelooking at various options. One possibility
is to buy bulk lots of unsold residential
stock that developers continue to hold on
their books with a view to converting it toserviced apartments. A number of dealsof this type were struck in 2018. Anotheroption is to convert these units to co-living
facilities on the premise that slowing job
creation and wage growth will lead tofurther softness in residential sales anda corresponding increase in demand forrentals.
The logistics sector has also drawn
significant foreign investor interest given
growth in e-commerce and a structural
shortage of modern logistics space.
However, barriers to entry are problematic.
According to one local consultant: “Thereason why logistics warehousing hasn’t
gone completely bonkers is because theindustrial land price is too high—basicallypeople who want to build sheds can’t
buy the land at a price to make it work forthem.” As a result, activity in the sector
has dropped dramatically. According toa recent report from brokers Cushman& Wakefield, Jakarta industrial land sales
were down 60 per cent year-on-year in thefirst half of 2018.
Bangalore (16th in investment, 14th
in development). IT continues to be
the driver for Bangalore, with the focus
of growth now shifting to the Outer Ring
Road and other areas that used to be on
the periphery. However, the city’s office/business park story has now been in playfor a number of years, and while uptake
remains strong, concern is mounting overmarket saturation, peaking growth, andrising rents, especially as AI and othertechnological solutions begin to cannibalise
the business process outsourcing (BPO)
industry that has been such a strong driverof demand in recent years. Nonetheless,
new tenants continue to arrive in force.
Bangalore’s already low vacancy rates
declined further to 3.3 per cent in mid2018, despite some 5.1 million square
metres of new supply, according to JLL.
With take-up expected to remain some ofthe highest in the Asia Pacific (totaling a

projected 25 million square feet between
2018 and 2020), fears of stagnation may
be overblown.
As one locally based consultant said:“Growth rates in Bangalore are certainly
not the same, the infrastructure story
has struggled to keep up, and pollution
levels have increased. But the cluster
effect is so pronounced, especially froma tech perspective, that even today large
IT companies looking at specialised skill
sets find it very hard to avoid it. So while
Hyderabad’s emergence has stolen someof Bangalore’s thunder, it continues to be
the top draw for office occupiers.”
Investment
prospects

8Development
prospects

GOOD

7
6

5.05

5
4

5.14
FAIR

3
2
1
0

Bangalore
POOR’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19

Meanwhile, good-quality retail in Bangalore
continues to perform well, as does thelogistics sector. “Wherever you have land,
there are enough takers asking to commit,”
said one local investor.
New Delhi (17th in investment, 13th
in development). Markets in Delhi havea reputation for being more speculative
than in other parts of India, making themmore volatile on both the upside anddownside. There also tends to be more ofa focus on the residential sector, wheredevelopers have recently been subject toa regulatory campaign aimed at shaking
out longstanding industry malpractices. As
a result, mid-market developers “continue
to be the big pain point” in the Delhi areain 2018, with frequent reports of developer
defaults or arrests. Moreover, as local
banks further tighten access to developer
finance in the second half of 2018, distresshas become apparent among somesmall and medium-sized development
companies in the area.

Emerging Trends in Real Estate® Asia Pacific 201946

Chapter 3: Markets and Sectors to Watch

On the commercial side, prospects are
more positive. Office space continues toperform well across the board, with yields
in the area of 8 per cent for quality assets,according to JLL. In particular the subdistrict of Noida “has been a star performer
across the country,” according to one
local investor, with more than 10 per centyear-on-year growth in grade-A IT parkand office space absorption following thegovernment’s announcement of a new
airport for the area and other ongoing
improvements to local transportation
infrastructure. With grade-A space still
renting for around US$0.80 per square footper month, it represents a “sure-shot equity
investment opportunity.”
Investment
prospects

4 FAIR2
POOR’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19

China’s second-tier cities (18th ininvestment, 17th in development).
Confidence is particularly shaky in China
when you move beyond the four Tier 1
cities. The slimmer the existing institutional
stock, the more investors and developers
rely on the local government to ensure
an affordable stream of land and supply.
That is not happening, as provincial
and municipal officials adapt to tighter
restrictions from Beijing. Liquidity is poorest
in these secondary cities, with banks
hamstrung by new lending policies, thebond markets tough to access, and trustbanks and the “shadow banking” systemclosed off.
Yet if you believe China will be the newchampion of free trade, active along andbuilding new Silk Roads, the industrial
heartland is likely to get the biggest
boost from China’s rise. Cities suchas Chongqing, Chengdu, and Wuhan
approach 20 million people each, making

47

5.06

R
4 FAIR

China – second-tier cities

POOR

’13

’14

’15

’16

’17

’18

’19

The Chinese cities are crying out forinternational-grade office, industrial, andretail space. The challenge is delivering thatat the right price point, while avoiding theoversupply that often exists in lower-quality
space. Product differentiation and branding
will be key, requiring deep understandingof the specific city in question.
Manila (19th in investment, 19th indevelopment). The steep fall in sentimentin last year’s survey towards Manila
has persisted this year. The problem isprobably partly one of optics, because
fundamentals continue to be strong.
Office rents and capital values have risen
relentlessly, vacancies have fallen to a low
2 per cent, yields are in the area of 8 per
cent, and strong absorption of new stock
continues based on activity from the online
gaming and BPO industries.
At the same time, however, foreign
investors are deterred by domestic politicalconcerns, regulatory barriers to entry that
restrict foreign equity interests in local
property assets to a maximum of 40
per cent, and most recently by potential
economic consequences of capitaloutflows caused by rising interest rates
both domestically and in the United States.

Emerging Trends in Real Estate® Asia Pacific 2019

6
4.99

5
4 FAIR

5.03

POOR’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19

5.01

5.19

3

Manila

7

0

5

5.03

8 GOOD

1

6

Development
prospects2

71

Investment
prospects

3

Development
prospects

8

0

5

0

Investment
prospects

2

New Delhi

61“If you’re brave, that’s where you should
be investing,” one family-office head withholdings in Chongqing said. “They’re like
Leeds in the U.K. or Kansas City in theU.S.” Only 40 times that size.

3

Development
prospects

8 GOOD
7

them “secondary cities” with populations
around the size of the Netherlands.

What’s more, one fundamental issue thathas long acted as an indirect barrier forforeign capital remains in place—local
asset markets are overflowing with cheap
domestic capital. Foreign players who
demand risk-adjusted returns in the highteens are therefore priced out of the market
by local banks offering financing at 2.75
per cent.
Still, local developers are now increasingly
open to working with foreign players inorder to leverage operational expertise
as well as their international connections.
In addition, good opportunities are
increasingly available for investors able
to find reliable local partners and to
think out of the box, in particular bytargeting alternative or emerging sectors.
While growth in the BPO industry has
now levelled off as automation andartificial intelligence (AI) technologies eat
into market share, new opportunities
are opening up in other areas. The
government’s infrastructure push is
one theme. Another is the logistics andindustrial park sectors, not only because of
the shortcomings of existing facilities, butalso because Chinese manufacturers are
increasingly moving operations into Asianemerging markets in an effort to avoid thefallout of an impending trade war with theUnited States.
Auckland (20th in investment, 21stin development). Although the market
in Auckland is small, it is in many ways
perfectly formed. While New Zealand’s farflung location ensured for years it remained
off the radar, investors from Australia,
Singapore, China, and the United Stateswarmed to the theme when they realised
demand was strong, yields were high, andsupply was tight and in many cases dated.
Today, however, rising rents and(especially) capital values mean the New
Zealand investment story has become
somewhat worn. Given the limited sizeof the opportunity, international investors
in the commercial space have corneredmuch of the higher-quality stock anddevelopable land in the city centre. Cap
rates have continued to compress in thefirst half of 2018, with prime assets in
Auckland transacting in the area of 5.5 per
cent, according to CBRE. Although foreign
investor activity continues to be strong,at these levels, there is limited scope fordownward pressure on yields.

that forced local institutional investors
to channel their capital into domestic
assets, pushing yields down to someof the lowest in Asia and taking mostinvestable properties off the market. Whilethat scenario has now changed—local
institutions are now compelled to invest
offshore—the longstanding repercussions
to the domestic investment landscaperemain in place. Taipei therefore remains
unpopular with cross-border investors, who
prefer not to compete with local institutions
whose buying keeps yields at around 2.5
per cent.
Investment
prospects

Development
prospects

8 GOOD
7

Development
prospects

Investment
prospects

4 FAIR
Auckland7
6

4 FAIR

4.98

3
2

0

4.99

3
4.97

5

1

4.90

5

8

POOR

’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19

At the same time, supply shortages and(according to some) an influx of foreign
capital have seen residential prices in
Auckland double over the last 10 years,
sparking a backlash from authorities
and resulting in tight restrictions on
foreign buyer purchases (Australians andSingaporeans excepted).
As a result, Auckland has plunged in thisyear’s investment prospect rankings.
Although office is as usual the go-to sector,
industrial assets have also seen strong
demand, driving vacancies down to under
1 per cent.
Taipei (21st in investment, 20th indevelopment). Taipei has now beenrooted to the bottom of the survey table
for several years, largely as a result ofa domestic investment environment

0Development
prospects

8 GOOD
7
6
4.89

5

2
1

Kuala Lumpur (22nd in investment,
22nd in development). Kuala Lumpur
office rents have been falling in 2018 andwith 20 million square feet of new supply
due to hit the market by 2020, the shortterm outlook remains gloomy. Demand isweak, but there has been some interest
from both local and global co-working
companies.

Taipei

6
Investment
prospects

A surge in visitors from Mainland China
in 2016 has not been maintained. As aconsequence, the hotel sector has sufferedand Taiwan is now trying to promoteitself as a MICE (meetings, incentives,
conferences and exhibitions) destination
and also to boost US visitor numbers.

R
4 FAIR

4.90

3

POOR

’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19

Transactions of any sort were thin on the
ground in 2018, with most buyers being
owner-occupiers. With rental growth
predictions of around 2 to 3 per centin 2018, there has been little to interest
investors. The Taiwan economy has been
fairly strong, with GDP growth of 3 per centexpected for 2018 and unemployment
below 4 per cent. Office demand comesmainly from the financial and technology
sectors.
Taiwan’s insurers have been able toinvest offshore for several years, but theiracquisitions have slowed dramatically as
the lengthy approval process required
has made it almost impossible for them tocompete with more nimble buyers.
Authorities recently announced a numberof public/private partnership projects
involving both new development andregeneration located on governmentowned land near major transit hubs inthe capital. These projects may offer arare opportunity for foreign investors toparticipate in the local market.

2
1
0

Kuala Lumpur
POOR’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19

Prime retail rents continue to increase,although modestly, due to the effectof huge supply. There is a gulf in rental
performance between established prime
malls and new centres. In 2017, five newmalls totalling close to 3 million square
feet of retail space were opened in 2017
and there is a significant number of large
shopping centres and boutique malls
currently being constructed. A number ofoverseas developers are active in the retailand mixed-use development space.
The residential market has also been
affected by politics; however, a rising
population, low unemployment, and fairly
robust growth mean underlying demandis strong. Supply was high up to 2017 but
has slowed in 2018 and observers expect
a modest upturn if 2019 sees a return topolitical stability.

Emerging Trends in Real Estate® Asia Pacific 201948

Chapter 3: Markets and Sectors to Watch

Property Types in Perspective

foreign-backed deals pick up again.

OFFICE

Ho Chi Minh City is again the standout
development market, although the sizeof the opportunity is small. Opportunists
say Vietnam has many merits, particularly
when it comes to the young, energetic
workforce. With a lack of high-quality officespace, it’s lazy thinking to call this “China
in miniature.” But there’s no doubt thatthe command-driven economy makes
life easier, particularly under a newly
business-friendly administration. Vietnam’s
government, in contrast to China, needs
the money provided by foreign investment,
and is far more welcoming to outside
players at the moment.

Office remains the target of choice forinvestors into Asia. The vast majority (86per cent) of survey respondents are alreadyactive in the asset class, or intend to be.
Office provides stable yields, the promiseof capital gains, and demand linked to thegenerally strong economics of the region.
Core locations in gateway cities are stillseen as bullet-proof choices, and above
all other assets, office buildings provide
the opportunity to put a large amount ofmoney to work in one go.
The worry is that it is taking larger andlarger amounts of money to do so. You
have to have a very long time horizon,
as insurers and pension funds do, tostomach some of the low yields and highcapital values on offer. Even then, thoseplayers are far pickier than they mightpreviously have been, micro-managing
location selections and building choice.
They may expand their search beyond theprimary business district to find the rightopportunity.

Many an investor has said that Japan isreally only one market: Tokyo. Its popularity
remains as steady as its monetary policy
is easy. But the county’s steady economic
expansion and stable politics—Prime

With credit tightening raising questions
about the direction of the Chinese
economy, India has attracted significant
big-money backing. Business-parkdevelopment is creating whole new
suburbs around cities such as Mumbai
and Bangalore, although it pays to keeptabs on where new university graduates
are heading, bringing second-tier cities
such as Pune into the conversation. India’stransparency has gotten a boost from theimplementation of new real estate laws that

Exhibit 3-4 Office Assets Buy/Hold/Sell Recommendations for 2019,
by City
Buy

Nimbler owners and investors say there arestill trading opportunities, and cheap land
if you know how to look and have capable
and trustworthy local connections. Valueadd, opportunistic, and development plays
provide entryways into markets where
locals may pay over the odds for prestige
assets.
With far more money looking for accessinto Asia than there are core assets
available, “develop to core” is a popular
strategy even for the most risk-averse
investors.

Minister Shinzo Abe is the longestserving post-war leader—is encouraging
exploration into other markets. Run
down the list of Japan’s largest cities
by population, and you’ll find the top
targets for commercial investment anddevelopment, proponents arguing thatthese metro giants are the beneficiaries
as rural and provincial Japan ages and ishollowed out.

Hold

Sell

Ho Chi Minh City 46

41

12

Tokyo 37

49

14

Singapore 37

47

16

Sydney 35

49

17

Mumbai 34

52

14

Osaka 34

52

13

Bangalore 34

50

16

Shanghai 34

47

19

Melbourne 33

51

16

Seoul 30

54

16

Shenzhen 30

48

22

Manila 30

44

26

China – second-tier cities 27

41

32

Jakarta 26

53

21

Guangzhou 26

53

20

Bangkok 25

61

14

Beijing 25

54

21

Expected best bets: Singapore’s
correction is over, and rents are rising, withvacancies down. There may be a windowof solid opportunity to develop core officespace, with big-money backing. Officerental growth has been stellar in Sydney
and Melbourne, and while no one has
called the top of the market, participantsquestion how long that can go on. The
resource-reliant markets of Perth andBrisbane share Singapore’s countercyclical pattern, and have started to see

51 Emerging Trends in Real Estate® Asia Pacific 2019

New Delhi 2360

17Hong Kong 23

51

27

Kuala Lumpur 22

54

24

Auckland 21

65

14

Taipei 14

67

19

0%

20%

40%

60%

Source: Emerging Trends in Real Estate Asia Pacific 2019 survey.

80%

100%

are raising developer practices closer tointernational standards.
RESIDENTIAL
Ho Chi Minh City sits atop the shopping
list for residential investors, with mass- andmid-market housing seen as the sweet
spot. This is a pure development play for
now, and a fragmented market where it’s
hard to build scale.
Southeast Asia’s strong demographics arealso driving residential interest in Jakarta,
Manila, and Bangkok. As incomes rise,affordability improves and stimulates theneed for middle-class housing through theregion that is often lacking in quality stockat the right price point.
Tokyo’s office market is a stalwart choicefor institutional investment. But rental
residential property is ascending in interest,with Japan the only nation in the region to
boast sufficient depth in the market for big
players.
It takes a brave buyer to be bidding on
residential lots of land in China at the
moment. Under Beijing’s directive to keep
prices in check, regional and municipal
governments have sought administrativemeans of controlling the market, leading
to highly unpredictable operating
environments.
Expected best bets: Ho Chi Minh Cityand to a lesser extent Hanoi are both
attractive for residential development. Theirsimilar size, at 7 million people in the metroarea, ranks them only behind Jakarta
and Bangkok in Southeast Asia. A stableeconomy growing at a forecast 6.6 percent in 2019 is similar to China’s growth,with fewer current political complications.
The small size of the existing investable
stock in Southeast Asian cities means
choice of local development partner willbe the critical component in any deal.
Jakarta and Manila may be “ones towatch” for a lot of overseas investors, who
are interested but not yet active. The rightproduct should entice backers with anappetite for risk.
Mumbai is the pick of the residential
markets in India. This requires strong

country-specific expertise, though, anda lot of global investors favour otherasset classes in the country, particularly
logistics space, but also retail. Residential
developers face tighter constraints on
how they can generate cash flow fromprojects under development, whichfavours the biggest players and may cause
bankruptcies among weak developers.
For developed markets, Tokyo sustains
institutional interest and is the top
residential play, with Osaka a close second.
Japanese development standards areworld-class, but this a market dominatedby massive developers with brand namesthat already carry cachet—and more thanlikely don’t need foreign financial backing.
International investors may look to pick up
existing portfolios from proven developers.
There is some scope for holiday orinvestment property targeted at foreign
buyers, since Japan is now virtually alone

in Asia as having no restrictions on foreign
homeownership.
Home values have turned down in Sydney
and Melbourne, and there’s gloomy talk ofa prolonged downturn. Affordability is evenfarther stretched in Hong Kong, where theselloff in equity markets has dented alreadyshaky sentiment due to rising U.S./HongKong interest rates.
RETAILThe retail sector continues to be tough forlandlords and the retailers themselves, as
they try to adapt to tech-driven changes in
shopping habits, such as e-commerce andmobile payments.
Retail remains at the bottom of thepreferred sector rankings and for 16 of
the 22 cities. The percentage of sellers ishigher than the percentage of buyers, morethan for any other property sector.

Exhibit 3-5 Residential Assets Buy/Hold/Sell Recommendationsfor 2019, by City
Buy

Hold

Sell

Ho Chi Minh City 38

45

16

Mumbai 32

50

19Tokyo 30

56

14

Osaka 28

58

14

Melbourne 27

53

20

Singapore 27

52

21

Jakarta 26

54

21

Shanghai 26

53

21

Manila 26

52

23

Bangkok 25

55

20

China – second-tier cities 25

48

27

New Delhi 24

55

21

Sydney 24

54

22

Hong Kong 24

46

29

Bangalore 23

58

19

Auckland 23

54

23

Seoul 2264

14

Shenzhen 22

57

21

Guangzhou 20

53

26

Beijing 17

57

26

Kuala Lumpur 17

52

31

Taipei 14

68

18

0%

20%

40%

60%

80%

100%

Source: Emerging Trends in Real Estate Asia Pacific 2019 survey.

Emerging Trends in Real Estate® Asia Pacific 201952

Chapter 3: Markets and Sectors to Watch

Some retail landlords argue that Asia,
especially China, is dealing with the
e-commerce challenge better thandeveloped markets in the West because
retail real estate is a newer concept in Asia.
The argument goes that the developmentof the mall in China came at the same timeas the development of online shopping.
Furthermore, Asia was ahead of thecurve in having more F&B in malls andhaving that F&B offer at the heart of thedevelopment.

Exhibit 3-6 Retail Assets Buy/Hold/Sell Recommendations for 2019,
by City
Buy

One retail landlord notes that U.K. and U.S.
shopping centres “have the restaurants
on the fringe, or in one particular corner,and I think that is killing it because people
go there for the food, go there for thesocialising. But if you put it at the fringe, it
is not driving traffic to the mall.”Perhaps reinforcing this viewpoint, retailin Pacific cities, which has been modelledon the U.S. mall, dropped dramaticallydown the buy/sell/holding rankings, with
Auckland falling 13 places and Melbourne
and Sydney both dropping in popularity.
Nonetheless, over the past decade, Asia
has probably seen more ill-conceived
retail development than any other region,
although this is changing as landlords
recognise the need for specialist management of retail assets. Branding andcommunity building have become crucial to
the success of a shopping centre.
The fickleness of millennial shoppers is aheadache for retail developers, who haveto match the drawn-out process of bringing
a mall to market with ever-changing
shopping habits. “Five years is a long timein retail; in fact, five months is a long time inretail. When something goes out of fashion,or something goes in fashion, we need tomake sure we have the flexibility to adapt.”
Expected best bets: Ho Chi Minh City
is once more the favoured location forinvesting in retail real estate, yet as inprevious years it is unlikely that muchcross-border capital will flow into thesector. This is perhaps just as well, as
Cushman & Wakefield estimates more than
600,000 square metres of new retail space
will be completed by 2020, equivalent tohalf the city’s existing retail supply.

Hold

Sell

Ho Chi Minh City 37

46

17

Bangalore 27

50

23

Mumbai 25

53

22

Bangkok 23

59

18

Shenzhen 23

48

29

Manila 22

54

25

New Delhi 21

58

22

Jakarta 2156

22Singapore 21

54

25

Tokyo 2061

19

Osaka 20

61

18

Melbourne 20

55

25

Shanghai 20

55

24

Hong Kong 20

53

27

China – second-tier cities 20

49

31

Sydney 19

58

23

Guangzhou 19

53

29

Seoul 18

63

19

Beijing 15

53

33

Taipei 14

65

21

Auckland 14

60

26

Kuala Lumpur 12

57

31

0%

20%

40%

60%

80%

100%

Source: Emerging Trends in Real Estate Asia Pacific 2019 survey.

Bangalore and Mumbai are also favoured
and large global investors have been
putting capital into retail projects in theseand other Indian cities. India saw hugeretail supply over the past decade, muchof it badly located and badly managed;
investors see this as an opportunity to add
value with better asset management.
Both Tokyo and Osaka are receiving someinterest; not many are buyers of retail there,
but the buyers outweigh the sellers. The
outlook for Japanese retail looks shaky
though; the delayed GST increase that isdue next year is expected to undermine theretail market, which had benefitted fromrising wages and tourism numbers.
INDUSTRIAL/LOGISTICS
Despite giving up its top spot to offices
as survey respondents’ preferred sector,

53 Emerging Trends in Real Estate® Asia Pacific 2019logistics remains extremely popular withinvestors in Asia Pacific real estate. As
with all sectors, respondents have become
more cautious over the past year, withsome buyers becoming holders.
While the services on offer may seemstraightforward, the sector is dominatedby a relatively small number of specialist
regional and global operators able to scale
up aggressively and digest big chunks ofcapital from global pension and sovereign
investors. The ability to build relationships
with national and global third-party logistics
companies is as essential for success as
the ability to source land and develop to
the right specification.
Cap rates for modern warehousing stock
have compressed dramatically over the
past decade and those involved in thesector claim they ought to move in further,with one developer stating: “Our mature
Japanese warehouses are 99 per cent let
and that only dropped a few percentage
points in the GFC. With the income stability
the sector offers, it should not trade at a
discount to other sectors.”
The U.S.-China trade war could affectindustrial space in China, but respondents
said the main driver of the Mainland
logistics market today is domestic
consumption and e-commerce, whichis also the case across the region.
The next move in logistics development will
be away from large out-of-town distribution
centres and towards smaller facilities
nearer to or in the centres of cities, in orderto satisfy demand for “last mile” delivery.
China and Japan are the largest logistics
markets in the region, but the past 12 to
18 months has seen growing interest in
India and in Southeast Asia, where there isminimal modern warehousing available.
Another trend is for logistics owners toprovide an increasing range of services totenants, such as machinery and technology
solutions. An ostensibly simple sector istherefore rapidly gaining in sophistication
and becoming more of an operating
business, providing real estate as a service.
Expected best bets: The Indian cities
of Mumbai and Bangalore shot to the
top of the buy/hold/sell rankings, rated
a “buy” by 41 per cent and 45 percent of respondents respectively. India
has seen substantial investment in the
sector in the past year or so, following
a number of legislative measures thathave boosted its attractiveness. Chief ofthese was the national Goods & Services
Tax, which replaced a bewildering
array of local taxes that prevented thedevelopment of nationwide distribution
networks. Nonetheless, investors in Indian
warehousing will find land supply and alack of infrastructure a headache, although
the government has pledged to deal withthe latter.
China’s larger cities remain amongst
the top picks as—despite a decade

Exhibit 3-7 Industrial/Distribution Assets Buy/Hold/Sell
Recommendations for 2019, by City
Buy

Hold

Sell

Bangalore 45

41

14

Mumbai 41

46

13Singapore 39

53

8Shenzhen 39

48

13

Ho Chi Minh City 38

50

12

Shanghai 37

51

12Tokyo 36

57

7

Sydney 36

51

13

New Delhi 36

50

14Guangzhou 36

46

18

China – second-tier cities 35

45

20

Bangkok 34

56

10

Melbourne 34

56

10

Auckland 33

56

12

Seoul 3259

9

Hong Kong 32

53

15

Jakarta 32

53

14

Beijing 31

53

17

Manila 29

56

16

Osaka 2761

12

Kuala Lumpur 23

63

14

Taipei 19

66

16

0%

20%

40%

60%

80%

100%

Source: Emerging Trends in Real Estate Asia Pacific 2019 survey.

of development—it is fundamentally
undersupplied with modern logistics
space. Players in the market are either
very local or large regional or global sector
specialists, who can seal deals with bothcity governments and international 3PLs.
Ho Chi Minh City also ranks highly and is
expected to benefit as manufacturers moveindustrial facilities out of China, due among
other things to fears over the China-U.S.
trade war. International capital moved into
Vietnamese logistics and industrial in 2018,with private-equity players backing local
developers.
Tokyo continues to be a popular choice forthe sector, but contrasts with Osaka, which
is digesting short-term oversupply that has
led to vacancy rates of around 12 per cent,according to Savills research.

HOTEL
Increasing tourism in both developed anddeveloping markets is keeping the hotels
sector on investors’ radar screens. Investor
demand for hotels remained solid in 2018as total investment volumes rose 17.8 percent year-on-year to US$11.9 billion for the
12 months ending June 2018, according to
CBRE data.
The most significant driver of tourism in the
Asia Pacific region remains China; its sheer
size and therefore the spending power of
its emerging middle class mean Chinese
tourists are in demand in many nations.
A number of countries, including Japanand the Philippines, are progressing thedevelopment of integrated casino resorts,
where the clientele is expected to be mainly
high-spending Chinese gamblers.

Emerging Trends in Real Estate® Asia Pacific 201954

Chapter 3: Markets and Sectors to Watch

The United Nations World Tourism
Organisation expects Asia Pacific tourist
numbers to rise again in 2018, andaccording to CBRE, Asia Pacific hotel
occupancy increased 120 bps to 71.3
per cent over the 12 months to end-June
2018. However, mature markets suchas Hong Kong, Singapore, Sydney, andTokyo saw occupancy above 80 per cent,
CBRE said.
Nonetheless, a lot of investor attention is
focused on developing tourism markets,
seen as an opportunity to create value.
One regional adviser says: “Everybody
wants to be in tourism and leisurebecause it is seen as a way of kick-starting
economies. It is a way of developing lesswell-developed areas because you can bein a remote area, but if you have a really
nice beach or some fantastic scenery you
will get tourists.”

Ho Chi Minh City remains a popular
choice, even though Tokyo took the top
spot, and the growth in visitor numbers toJapan suggests there is underlying growth
to support the city as a target for hotel
investors. However, the small size of thecity and the lower capital values mean thatmost will struggle to deploy capital there.
Singapore shot into the top five cities
for hotel investment this year, but it has
already seen a number of new hotels
developed over the past few years, which

Sydney remains undersupplied with hotels
and existing assets have been taken out
and converted to serve the booming office
and residential sectors. It will be hard forhotel investors to compete with potential
redevelopers for some time, at least in coreareas of the city. However, Sydney lacks
five-star and good-quality four-star hotels,so there ought to be opportunities in the
future.

Exhibit 3-8 Hotel Assets Buy/Hold/Sell Recommendations for 2019,
by City
Buy

In the first half of 2018, the biggest gains
in visitor numbers came in Vietnam, which
saw arrivals rise 28 per cent year-on-year
to 7.8 million thanks to a combination ofincreased marketing and relaxation of visa
rules for several countries. Thailand also
saw visitor numbers grow 12.5 per cent in
the same period, with most of the growth
coming from China.
Japan has also seen a substantial rise invisitor numbers over the past five years
and is expected to continue to see strong
growth through 2020, when the Tokyo
Olympics are held. Visitors to Japanare now often coming for the second or
subsequent time and are now more likely
to visit cities other than Tokyo and Osakaand to travel independently.

suggests the best time to invest in the
sector there has passed.

Hold

Sell

Tokyo 42

45

13

Ho Chi Minh City 41

46

13

Sydney 38

54

8Singapore 35

54

12

Osaka 35

51

13

Melbourne 34

55

12

Bangkok 33

55

12

Jakarta 27

57

16

Hong Kong 26

63

11

Seoul 26

62

12

Manila 26

50

24

Auckland 25

61

14

Kuala Lumpur 22

56

22

Shanghai 21

63

17

Shenzhen 21

63

17

New Delhi 2064

16

Mumbai 19

64

17

China – second-tier cities 18

51

30

Expected best bets: Tokyo topped thelist of preferred cities for hotels this year,
although many observers consider that it is
too late to get into to the hotel sector there.
While the Olympics will improve all tourism
numbers, the long-term growth of tourism
to Tokyo is limited by the capabilities of
its airports, both of which are close tocapacity. On the other hand, Osaka andregional cities could still see substantial
growth.

55 Emerging Trends in Real Estate® Asia Pacific 2019

Bangalore 17

60

22

Guangzhou 15

6223

Beijing 14

66

20

Taipei 13

72

15

0%

20%

40%

60%

Source: Emerging Trends in Real Estate Asia Pacific 2019 survey.

80%

100%

Interviewees
Dougie Crichton
Richard Price
Actis
Brian Chinappi
AD Investment Management Co. Ltd.
Kenji Kousaka
ALE Property Group
Andrew Wilkinson
Allianz Real Estate
Rushabh DesaiAMP Capital
Tim Nation
Angelo Gordon
Jon Tanaka
Aqualand Australia
John Carfi
ARA Trust Management (Cache) Ltd.
Daniel Cerf
AXA Real Estate Investment Managers
Japan KK
Yoshihiko Hayafuji
Bank of America, Merrill Lynch
Ben Boyd
Bank of Melbourne
Jim Serafim
Blackstone
Chris Tynan
Brookfield Asset Management
Niel Thassim
Capbridge Investors KK
Ken Fridley
CBRE
Henry Chin
Charter HallDavid Harrison
Colliers International
David Faulkner
John Kenny

GenReal Property Advisers
Anckur Srivasttava

Mitsubishi Estate Co. Ltd.
Tetsuji Arimori

Goldman Sachs Asset Management
Japan
Katsuhiro Ishikawa

Mitsubishi Jisho Investment Advisors, Inc.
Eriko Kato

GPT
Matthew Faddy
Nick Harris
Grosvenor Asia Pacific
Ben Cha
Hodes Weill
Alfredo Lobo
Hon Kwok Land Investment Co. Ltd.
James Wong
Hulic Co. Ltd.
Yoshito Nishikawa
Infrared Capital Partners
Stuart Jackson
Hans Kang
Ingenia Communities Group
Simon Owen
ISPT
Darren Shultz
Japan Post Bank Co. Ltd.
Yuki Ogawa
Hiroyuki Tanaka
Japan REIT Advisors Co. Ltd.
Norimasa Gaun
JLL
Fergal Harris
Megan Walters
JPMorgan Asset Management (Japan)
Ltd.
Tetsuya Karasawa
Kenedix Inc.
Hikaru Teramoto
Takahiro Uchida
Keppel REIT / Keppel Capital Holdings
Pte. Ltd.
Paul Tham

CRE REIT Advisers, Inc.
Tsuyoshi Ito

LaSalle Investment Management
Chris Chow
Mark Gabbay

CVS Lane Capital Partners
Lee Centra

Lendlease
Tarun Gupta

Daiwa House Industry Co. Ltd.
Tetsuo Suzuki

Link Asset Management Ltd.
Eric Yau

Far East Organization
Philip Ng

Mapletree Investments Japan K.K.
Norihiro Matsushita

Fort Street Advisers
Richard Hunt

Mitsubishi Corp.—UBS Realty Inc.
Katsuhisa Sakai

Fukuoka Realty Co. Ltd.
Etsuo Matsuyuki

Mitsubishi UFJ Trust and Banking
Corporation
Hiroyuki Seki
PAG Asia
Jon-Paul Toppino
PAG Investment Management Ltd.
Naoya Nakata
Pamfleet
Andrew Moore
PGIM Real Estate
Benett Theseira
Professional Property Services
Nicholas Brooke
Property Council of Australia
Ken Morrison
PropertyLink
Stuart Dawes
Savills
Chris Mancini
SCA Property Group
Anthony Mellowes
Scentre Group
Peter Allen
Starr International Investment Advisors(Asia)
Alison Cooke
Swing Property
Richard Johnson
TH Real Estate
Chris Reilly
The Blackstone Group Japan KK
Wataru Goto
The Net Group
Raymond Rufino
Tishman Speyer
Ryan Botjer
Tokyu Land Capital Management Inc.
Yutaro Tanaka
Touchstone Holdings Co. Ltd.
Fred Uruma
UBS
Grant McCasker
Wee Hur Holdings Ltd.
Goh Yeow Lian
Wing Tai Holdings Limited
Cheng Wai Keung

Emerging Trends in Real Estate® Asia Pacific 201956

Sponsoring Organisations

PwC’s real estate practice assists real estate investment advisers,
real estate investment trusts, public and private real estate
investors, corporations, and real estate management funds indeveloping real estate strategies; evaluating acquisitions anddispositions; and appraising and valuing real estate. Its global
network of dedicated real estate professionals enables it toassemble for its clients the most qualified and appropriate team of
specialists in the areas of capital markets, systems analysis andimplementation, research, accounting, and tax.

Global Real Estate Leadership Team
Craig Hughes
Global Real Estate Leader
London, United Kingdom
K.K. So
Asia Pacific Real Estate Tax Leader
Hong Kong, China
Paul Walters
Asia Pacific Real Estate Assurance Leader
Hong Kong, China
Gang Chen
China Real Estate Tax Partner
Jane Reilly and Josh Cardwell
Australia Real Estate Leaders
Sydney, Australia
Bhairav Dalal
India Real Estate Tax Leader
Mumbai, India
Brian Arnold
Indonesia Real Estate Leader
Jakarta, Indonesia
Jennifer Chang
Malaysia Real Estate Leader
Kuala Lumpur, Malaysia
Hiroshi Takagi and Hideo Ohta
Japan Real Estate Leaders
Tokyo, Japan
Taejin Park
Korea Real Estate Leader
Seoul, Korea
Chee Keong Yeow
Singapore Real Estate & Hospitality Leader
Singapore
Nguyen Thanh Trung
Vietnam Real Estate Leader
Ho Chi Minh City, Vietnam
Jason Liu and Richard Watanabe
Taiwan Real Estate Leaders
Taipei, Taiwan
www.pwc.com

The Urban Land Institute is a global, member-driven organisation
comprising more than 42,000 real estate and urban development
professionals dedicated to advancing the Institute’s mission ofproviding leadership in the responsible use of land and creating
and sustaining thriving communities worldwide.
ULI’s interdisciplinary membership represents all aspects of
the industry, including developers, property owners, investors,architects, urban planners, public officials, real estate brokers,
appraisers, attorneys, engineers, financiers, and academics.
Established in 1936, the Institute has a presence in the Americas,
Europe, and Asia Pacific regions, with members in 80 countries.
The extraordinary impact that ULI makes on land use decision
making is based on its members sharing expertise on a variety
of factors affecting the built environment, including urbanisation,
demographic and population changes, new economic drivers,
technology advancements, and environmental concerns.
Peer-to-peer learning is achieved through the knowledge sharedby members at thousands of convenings each year that reinforce
ULI’s position as a global authority on land use and real estate. In
2017 alone, more than 1,900 events were held in 290 cities aroundthe world.
Drawing on the work of its members, the Institute recognises andshares best practices in urban design and development for the
benefit of communities around the globe.
More information is available at uli.org. Follow ULI on Twitter,
Facebook, LinkedIn, and Instagram
W. Edward Walter
Global Chief Executive Officer
Urban Land Institutehttps://uli.org
John Fitzgerald
Chief Executive Officer, Asia Pacific
Urban Land Institutehttps://asia.uli.org
ULI Center for Capital Markets and Real Estate
Anita Kramer
Senior Vice President
www.uli.org/capitalmarketscenter
Urban Land Institute2001 L Street, NW
Suite 200
Washington, DC 20036-4948
United States
202-624-7000
www.uli.org

Front cover photo: Sino-Ocean Taikoo Li Chengdu is a retail-led, mixed-use development arounda bustling open-plan, lane-driven mall and grade-A office tower.
Image courtesy of Swire Properties Ltd.
Page 49 image: The Interlace by OMA/Ole Scheeren.
Photo by: Iwan Baan.

Emerging Trends in Real Estate®
Asia Pacific 2019
What are the best bets for investment and development in
2019? Based on personal interviews with and surveys from
373 of the most influential leaders in the real estate industry,
this forecast will give you a heads-up on where to invest,
which sectors and markets offer the best prospects, andtrends in the capital markets that will affect real estate. A joint
undertaking between PwC and the Urban Land Institute, this
13th edition of Emerging Trends Asia Pacific is the forecast
you can count on for no-nonsense, expert insight.
ULI is the largest network of cross-disciplinary real estate andland use experts who lead the future of urban development
and create thriving communities around the globe. Visit uli.
org/join to learn more about member benefits. Become part of
the ULI network where you can connect to other members via
the Member Directory (members.uli.org), engage in memberonly opportunities via Navigator (navigator.uli.org), and accessan expanding library of high-quality content via Knowledge
Finder (knowledge.uli.org), including all the Emerging Trends
in Real Estate® reports published since 2003.

www.uli.org

Highlights
Tells you what to expect and where the best
opportunities are.
Elaborates on trends in the capital markets, including
sources and flows of equity and debt capital.
Indicates which property sectors offer opportunities
and which ones to avoid.
Reports on how the economy and concerns about
credit issues are affecting real estate.
Discusses which metropolitan areas offer the mostand least potential.
Describes the impact of social and geopolitical trends
on real estate.
Explains how geographical and sectoral preferences
are changing.

www.pwc.com