Emerging Trends
in Real Estate®

Asia Pacific 2018

Emerging Trends in Real Estate®
Asia Pacific 2018
A publication from:

Emerging Trends
in Real Estate®
Asia Pacific 2018
Contents
1

Executive Summary2

Notice to Readers

3
3
4
6
6
8
8
9
16
16
18
20
22
22
23

Chapter 1 An Embarrassment of Riches
Transactions Slow in Major Markets
Core Buyers Take More Risk
Core Buyers Take Less Risk
Opportunistic Returns Continue to Fall
Core and Opportunistic Converge on Value-Add
Rental Growth Slowing?
Alternative Assets Pick Up SteamThe Coworking Juggernaut
Demand/Supply Imbalance
Vietnam and India Rank as Most Popular Developing Markets
Investors Still Bullish on Retail . . .
. . . But Others See Problems for Malls
Residential Markets Shrug Off Cooling Measures
Risk Fatigue

25
26
27
27
28
29
30
31
32
33

Chapter 2 Real Estate Capital Flows
Chinese Developers Reined In
Japanese Outflows Inch Up
Asian Outflows Will Only Increase
Incoming Flows Beginning to Rise
Fundraising
Banks Tighten in Some Markets
New Financing Options Evolving
Bonds
REITs

37
38
49

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

56

Interviewees

Emerging Trends in Real Estate® Asia Pacific 2018i

Editorial Leadership Team
Emerging Trends in Real Estate® Asia Pacific 2018 Chairs
K.K. So, PwCJohn Fitzgerald, Urban Land InstitutePrincipal Author
Colin Galloway, Urban Land Institute Consultant
Contributing Researchers
Pauline Oh, Urban Land InstituteYusnita Baharuddin, Urban Land InstituteMichael Owen, Urban Land InstituteKenneth Rhee, Urban Land InstituteAriel Shtarkman, Urban Land InstituteSenior Adviser
Anita Kramer, Urban Land InstituteULI Editorial and Production Staff
James A. Mulligan, Senior Editor
David James Rose, Managing Editor/Manuscript Editor
Betsy Van Buskirk, Creative Director
Anne Morgan, Cover Design
Deanna Pineda, Muse Advertising Design, Designer
May Chow, Senior Vice President, Marketing and Communications,
Asia Pacific

Emerging Trends in Real Estate® is a trademark of PwC and is registered in the United States and other countries. All rights reserved.
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© 2017 PwC. All rights reserved.
© November 2017 by PwC and the Urban Land Institute.

Printed in Singapore. All rights reserved. No part of this bookmay be reproduced in any form or by any means, electronic ormechanical, including photocopying and recording, or by any
information storage and retrieval system, without written permissionof the publisher.
Recommended bibliographic listing:
PwC and the Urban Land Institute. Emerging Trends in Real
Estate® Asia Pacific 2018. Washington, D.C.: PwC and the Urban
Land Institute, 2017.
ISBN: 978-0-87420-415-5

ii

Emerging Trends in Real Estate® Asia Pacific 2018

PwC Advisers and Researchers
Australia
Andrew Cloke
Anna Ellis
Christian Holle
David Coogan
Ewan Barron
Iain Boot
James Dunning
Jane Reilly
Josh Cardwell
Matthew Lunn
Morgan Hart
Scott Hadfield
Tony Massaro
China
Allan Zhang
Kathleen Chen
Hong Kong
K.K. SoPaul Walters
India
Abhishek Goenka
Anish Sanghvi
Bhairav Dalal
Dhiren Thakkar
Tanya Tandon

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
Takeshi Yamaguchi
Luxembourg
Carolin Forster
Kees Hage
Robert Castelein
Philippines
Malou Lim
Singapore
Chee Keong Yeow
Magdelene Chua
Wee Hwee Teo

Executive Summary
Of all the various influences that have combined to shape
recent investment flows into Asian real estate, one continues
to stand out: excess liquidity. Local sovereign and institutional
funds bearing vast stockpiles of accumulated cash are investing it increasingly in property, both regionally and globally.
The resulting competition for assets is changing the industry
in fundamental and often unexpected ways:
●●

●●

●●

●●

Traditional risk/return classifications are breaking down.
Many core investors are moving either up the risk curve (inan effort to meet target returns) or down the risk curve (inorder to seek the type of steady but safe yield no longer
available from sovereign bonds).
Opportunistic investors are also changing their return
expectations, usually downwardly. As one investor said:“It’s actually been happening for a while now; it’s just thatevery year a few more of them slip down the risk curve.”
Core and opportunistic investors are converging in thevalue-add space. Increasingly, therefore, investors arelooking to make money from working their assets rather
than via leverage or rental growth (which is anyway now
slowing in many markets).
Another byproduct of increased competition for assets is
an investor migration into markets and asset classes thatin the past did not receive much interest. In particular, fundmanagers are now willing to look at data centers, affordable housing projects, build-to-rent (or co-living) facilities,
and student and senior housing.

Another trend quickly gaining traction across Asia is the boomin shared workplaces, with coworking operators now the biggest demand driver for new office space in many cities acrossthe region. Such is the pace of change that both landlords
and investors are having trouble coming to terms with it. The
consensus, however, is that changes to workplace use arehere to stay—landlords should grasp the nettle to devise
operating models that will allow them to profit from thesechanges rather than treat them as a passing fad.
Meanwhile, developing markets in Asia continue to draw
investment interest. Vietnam and India were the standouts in
the interviews and survey—the latter in anticipation of highand long-term economic growth, the former for similar expectations regarding economic growth combined with a lower
base and the vast scale of investment opportunities on offer.
Investor concerns about how the Asian retail sector is goingto weather the challenge from e-commerce in the wake ofnumerous mall failures in U.S. markets were reflected in our
survey’s sector prospect ratings, where retail placed last.
That said, interviewee opinions were quite polarized, withsome suggesting that regional retailers will be able to deal

Survey Responses by Country/Territory
Malaysia 0.5%
South Korea 1.2%
United States 1.3%

Other* 1.7%

Indonesia 2.5%
Philippines
Singapore

Japan

3.4%
35.4%

5.7%
China

9.1%

11.0%
Hong Kong
13.7%

14.5%
India

Australia
Source: Emerging Trends in Real Estate Asia Pacific 2018 survey.
*Includes Germany, Vietnam, Fiji, Netherlands, New Zealand, Taiwan, Thailand, and theUnited Kingdom.

Survey Responses by Geographic Scope of Firm

44+29+261C
Other entity

Pan-Asia focus

Focused primarilyon one country/
territory

1%

27%

43%

29%

Global focus

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

with the challenge by changing tenant mixes, investing inneighborhood retailing facilities (which are less threatenedby e-commerce sales), and leveraging technologies such asheat mapping to increase mall efficiency. Others, however,were less sanguine, taking the view that landlords have underestimated the e-tailing challenge and continue to misinterpretconsumer preferences.

Emerging Trends in Real Estate® Asia Pacific 20181

In terms of capital flows, the ongoing exodus of money from
Asian institutions—mainly in the form of local sovereign wealthfunds and insurance companies—has continued to grow in2017. This, despite a crackdown by regulators in China (by far
the biggest source of regional outflows) that has now blockeda large amount of Chinese capital from moving into international markets.
The impact of this as far as Asia is concerned tends to be
restricted to investments by Chinese developers, in particularin Australia, where local interviewees reported the possibilityof stress among Chinese investors no longer able to source
capital to finish ongoing development projects. Long term,
however, there was a consensus that capital flows from Asianmarkets will probably only increase, given that local markets
lack the capacity to absorb the sheer volume of funds that
institutions need to deploy.
As far as capital markets are concerned, regional banks
remain the go-to source of funding for investors and developers in almost all jurisdictions. However, most interviewees
reported that while capital was in most cases readily available,banks are also beginning to tighten lending requirements insome markets, in particular in Australia and China. This may
create some “interesting investment pipelines” for the future,according to one investor, including provision of mezzanine
debt. As a result, a growing number of investors are now
looking to set up debt funds in order to supply alternative
sources of capital to those who may not be able to source itfrom banks.

The bloom has come off regional real estate investment
trust (REIT) markets this year as higher interest rates dim
the attraction of an asset class that tends to trade in line with
fixed-income assets. However, of the three major markets,
only Japan registered a significant downturn. Some investors
predicted an increase in the number of REIT takeovers in theregion after private players bought out several smaller regional
REITs in the first half of 2017. Finally, after several years ofspeculation, India seems primed to launch its maiden REIT inearly 2018, providing a long-awaited exit strategy for investment funds now active in the market or thinking of entering.
This year’s investment prospect rankings reflect a growing
divergence between investors embracing either growth- or
yield-driven approaches. Cities that were the biggest gainers
in this year’s survey were therefore those that offered significant rental growth (Sydney and Melbourne), returns that were
low but still higher than yields on sovereign bonds (Tokyo), or
long-term secular growth in emerging markets (Vietnam). In
addition, there was a huge resurgence in investor sentimenttoward Singapore, which appears to have found a bottom inboth the office and residential sectors.
In terms of prospects for individual property types, logistics
assets take pole position this year, with investors showing
renewed confidence in a story of long-term structural undersupply. As one fund manager put it: “The supply/demand
dynamics for contemporary modern logistics in Asia still
seems pretty good, and my guess is that it’s got legs.”

Notice to Readers
Emerging Trends in Real Estate® Asia Pacific is a trends and forecast publication now in its 12th edition, and is one of the most highly
regarded and widely read forecast reports in the real estate industry.
Emerging Trends in Real Estate® Asia Pacific 2018, undertaken jointly
by PwC and the Urban Land Institute, provides an outlook on realestate investment and development trends, real estate finance andcapital markets, property sectors, metropolitan areas, and other realestate issues throughout the Asia Pacific region.

Real estate advisory or service firm ...........................................19.7%

Emerging Trends in Real Estate® Asia Pacific 2018 reflects the views ofindividuals who completed surveys or were interviewed as a part of theresearch process for this report. The views expressed herein, including
all comments appearing in quotes, are obtained exclusively from thesesurveys 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. ULIand PwC researchers personally interviewed more than 110 individuals and survey responses were received from almost 600 individuals,
whose company affiliations are broken down below.

Throughout the publication, the views of interviewees and/or survey
respondents have been presented as direct quotations from the participant without attribution to any particular participant. A list of the interview
participants in this year’s study who chose to be identified appears at theend 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 to attempt to attribute any quote toa specific individual or company.

Private property owner or developer......................................... 25.5%
Fund/investment manager..........................................................24.4%

2

Emerging Trends in Real Estate® Asia Pacific 2018

Homebuilder or residential developer.......................................... 9.1%
Institutional equity investor........................................................... 6.3%
Bank lender or securitized lender................................................ 3.0%
Other entities.............................................................................. 12.0%

To all who helped, the Urban Land Institute and PwC extend sincere
thanks for sharing valuable time and expertise. Without the involvementof these many individuals, this report would not have been possible.

Chapter 1: An Embarrassment of Riches

An Embarrassment of Riches“One of the things that the increase in capital has created is a premium on execution
capabilities. And one thing is for sure:a lot more work is needed to generate

the same returns.”

As ever-growing flows of global and (especially) local capital
continue to pour into real estate markets across the region,
competition to buy assets in major Asian markets has reachedunprecedented levels. What’s more, with base rates remaining
low and yields on sovereign bonds showing no sign of rising
any time soon, pressure is only rising for more of Asia’s huge
capital reserves to rotate into higher-yielding assets, and inparticular, property.

deals were fairly easy. Then all the money flooded into Japan,
everyone is looking at logistics, and now there’s no easy landto buy. So, we went into buying contaminated land—we buy it,
clean it. It’s a messy process, but then you have a nice pieceof land just where it needs to be. But most of the lighter money
that’s recently come in is afraid to touch it, and it’s only experience that allowed us to do that. So, you have to keep going in
a little deeper to find those opportunities.”

This excess of abundance is making life increasingly difficult
for anyone looking to invest in Asian real estate. More buyers
not only mean more competition, higher prices, and lower
yields. They are also leading to increased appetite for risk anda growing exodus into alternative markets and asset classes
that normally would not register on investors’ radars.

Transactions Slow in Major Markets

Beyond this, the apparently irreversible flood of new capital
into Asian real estate has led to an evolution in the way that
deals are being sourced and executed. According to one
fund manager: “In the past, when we picked investments wewould just say, ‘This is China, so we expect capital values
will go up.’ And you just found whatever you thought met therequirements and then made the investment—it was a very
macro-led strategy.”
Today, that has changed. As another investor said: “We’restill targeting to generate 20 percent returns on opportunistic
risk, but we’re seeing a much greater component of that 20
percent coming from current income rather than total return orcap rate compression. That means you are now having to lookharder to find those types of opportunities, and you’re having
to work the asset a lot harder to enhance the cash flows.”
One investor, for example, described how much harder it istoday to find deals in the Japanese logistics sector: “We’ve
been there for 15 years. Back in the early days, you could
buy a piece of industrial land, put a warehouse on it, andAnother byproduct of today’s low-interest-rate, high-liquidity
markets is that—paradoxically—they create less incentive forproperty owners to sell, especially when the asset is a core
holding in a major market. This is not only because owners
believe (probably correctly) that a buyer-rich environment will
eventually deliver compliant purchasers, but also because
they fear (again, probably correctly) that if they do sell, they
will be unable to find a better way to invest their capital.
Weakness in core market transactions first emerged in 2016and has continued into 2017, with a small number of largetransactions making overall activity appear stronger thanit actually was, according to market analysts Real Capital
Analytics (RCA). This is fueling a general expectation thatmajor markets will remain soft going forward, a feeling reinforced by the conviction that banks in some markets havenow begun to tighten lending requirements.
Annualized commercial sales volumes for the first half of 2017
were notably down in Asia’s two big core markets: Australia(–35 percent) and Tokyo (–33 percent), according to RCA.
Equally noteworthy was the increase in transactions (i.e., by
14 percent) for Japan as a whole, as more capital rotatesaway from staple assets in Tokyo and into the provinces. This
reflects an Asia-wide theme of investment flows migrating toless-traveled areas.
Emerging Trends in Real Estate® Asia Pacific 20183

Exhibit 1-1 Transaction Volumes of Income-Producing Assets, Asia Pacific

Zone volume in US$ billion,
excluding development sites

60
50
40
30
20
10

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

0

150%

Year-over-year change

120%
90%
60%
30%
0%

–30%

–60%
–90%

Source: Real Capital Analytics.

Sales in Hong Kong soared in 2017, due in large part to anumber of large land and asset deals involving Mainland
Chinese capital. Singapore saw a 50 percent pickup in investment following a number of large deals, while development
site activity has also been strong, signaling anticipation of amarket bottom after several years in the doldrums.
Transactions in China, meanwhile, rose a healthy 11 percent(and rather more in tier-one cities), due at least partly to theimpact of tightened capital controls that are redirecting investment otherwise destined for international markets back into
domestic assets.

Core Buyers Take More Risk
As competition increases, cap rates flatten, and the numberof available assets declines, more core investors are opting
to migrate up the risk curve in search of yield, most obviously
via development projects. While this may represent, as one
fund manager put it, a “classic mispricing of risk,” today there

4

Emerging Trends in Real Estate® Asia Pacific 2018is greater acceptance among core investors of strategies
that create new product via build-to-core or forward-funded
projects, the rationale being that the growing number of institutional and sovereign funds looking to place capital provide aready exit for this type of play.
The emergence of this trend has been most pronounced in
China, where domestic insurance companies are happy to
pay prices considered excessive by global standards in orderto get money into the market. As one investor observed: “Theysay their challenge at the moment is not near-term returns, it’slong-term access to investment stock that will generate returns
when their actuarial models shift from having been recipientsof funds to being payers of benefits. And at the moment, their
inflows are such that they say, ‘I’d rather overpay today to beinvested in something I feel good about owning over the next
20 years than to get stuck in cash and miss out on owning
stuff that will provide for my policyholders in the long term’—and that’s not completely illogical.”Chapter 1: An Embarrassment of Riches

Exhibit 1-2 Sales Volumes for Most Active Global Real Estate Markets, First Half 20172016 rank

1H 2017

1
2
4
3
12
14
8
7
10
6
13
22
11
16
20
28
23
25
9
5
15
27
24
21
19
18
40
17
39
108

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
Los Angeles metro
London metro
San Francisco metro
Hong Kong
Boston metro
DallasDC metro
AtlantaTokyo
ShanghaiSingapore
Miami/South Florida
Amsterdam/Randstad
Berlin-Brandenburg
Frankfurt/Rhine-Main
Rhine-Ruhr
Houston
ChicagoParis
SeattleMadridAustinPhoenix
Seoul
DenverCharlotte
SydneyOrlandoYokohama

Sales volume (US$ million)

Year-over-year change
20,180 –40%
15,112–7%

14,7590%0%

11,866
8,269

5%

8,064

1%
27%

8,010
7,783

–3%
27%

6,515
–33%

6,207

43%

5,854

50%

5,801
–33%

5,699
5,262

6%

5,041

11%
58%

4,954

78%

4,928

41%

4,918
4,683

–38%

4,568

–56%
–26%

4,289

59%

4,190
3,818

3%
–16%

3,678

16%

3,631
–42%

3,469

48%

3,390
–30%

3,279

45%

3,260

566%

2,998

Source: Real Capital Analytics.
Note: Includes office, industrial, retail, apartment, and hotel properties.

Nor is development the only way to boost returns, with many
core investors now also opting for core-plus or value-add
plays as a way to generate extra yield.
Another new trend for core money is to revisit markets that in
the past it avoided, both to diversify and because they may
have more available assets. Hong Kong, for example, hasfor years been marginalized by most international investors
because its central business district (CBD) stock rarely trades;
and when it does, it is generally picked up by Mainland
Chinese buyers prepared to pay higher prices for flagshipproducts. But transactions in Hong Kong have been robustin 2017 and, anecdotally, a number of core funds are now
actively looking to invest, focusing on non-CBD assets withlonger-term growth potential. Basically, this reflects capitalflight from other core markets where assets either are notreadily available (Australia) or rental growth prospects havedimmed (Tokyo).

According to one locally based fund manager: “It will be interesting to see whether the multitude of core funds out there thathave been investing in Sydney and Tokyo over the last fiveto ten years can make a case for buying now in Hong Kong.
I think some are trying to. One of the funds we’re selling to at
the moment is a core/core-plus fund. Overall returns in Hong
Exhibit 1-3 Real Estate Firm Profitability Trends

excellent
goodfair2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: Emerging Trends in Real Estate Asia Pacific 2018 survey.

Emerging Trends in Real Estate® Asia Pacific 2018

5

Exhibit 1-4 Change in Targeted Returns Compared with 2017
Significantly lower

Somewhat lower

20%

40%

Same

Somewhat higher

Significantly higher

Opportunistic
Distress
Value-add
Core-plus
Core
0%

60%

80%

100%

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

Kong probably aren’t the same as they’re expecting in Sydney
and Tokyo and the risk profile is greater, but it’s a diversifier
to what they’ve already been doing in Asia, and I think they’retrying to justify it on that basis.”Seoul’s star has also been rising among core investors, particularly in the office space, mainly because “yields are not
crazy-low like they are everywhere else. There’s significant foreign and domestic interest for buying anything that is new witha stabilized income stream, and people are attaching a pretty
low yield to it. I’m not sure Korea is a huge growth story, but I
think people are looking for overall exposure in that market as
a part of an Asia Pacific plan.”6

Those willing to adopt more risk tend to be either existing funds
that need to hit preexisting targets (or at least not dilute current
earnings), while those in the safety-first camp are usually thosewith either longer duration or lower cost of capital looking toplay the yield spread—that is, assets that will generate longterm reliable yields of around 300 basis points over thoseoffered by local sovereign bonds. According to one analyst:“People are fixated on that spread and that’s what’s driving
money into real estate. As much as people want their growthin the rent and GDP, at the end of the day people like the big
pension funds and the big insurers have increased allocation
to real estate because of this spread between the two.”

Singapore, meanwhile, is seeing resurging interest as funds
begin fishing for a bottom in the market. According to one
local fund manager: “As far as the office market is concerned,
you are seeing a bit more demand coming in, and there’s
some pretty low-priced space for some pretty good quality.
But it may be premature—there’s been that huge shadow
space from the banks that has now shrunk, and there’s a lotof other space that’s not being used—people have had todownsize because those coworking spaces are starting tohave some traction.”

At present, there is no shortage of this type of buyer. Quite
apart from the vast amounts of newly arriving capital run by
Asian institutional and sovereign wealth funds, significant
amounts of private Asian money also are seeking a safe
home. According to one fund manager active in Japan:“We’ve recently been selling smaller, well-let, good Japanese
corporate-covenant assets to high-net-worth domestic buyers
who price totally different to institutions—they’re happy witha yield of three and a half. It’s not ‘front of the annual report’quality real estate, but we’ve been astonished by the depthof liquidity even in provincial Japan.”Core Buyers Take Less Risk

Opportunistic Returns Continue to Fall

The migration of some core investors away from what normally
would be considered core-type risk is not one-way traffic.
So, while plenty of managers are now willing to go up the risk
curve, there are also equal if not greater numbers headed in
the opposite direction, looking for conservative investmentsthat on paper will generate lower-than-normal core proceeds.
Survey results confirm that investors are expecting a bigger
drop in core returns than they are for any other asset class.
This is also in line with a global trend of shrinking returns for
institutional capital, which have fallen from an average of 11
percent in 2015 to 8.6 percent in 2016, according to a recent
study published by real estate advisory firm Hodes Weill.

Nor is core the only space where investors are being
squeezed out of traditional risk/return classifications: opportunistic buyers are also being forced to make downward
adjustments to return expectations. According to one HongKong–based fund manager: “What our investors are demanding on the opportunistic side is coming down. People used tosay plus-20 [percent]; now it’s plus-15 to 20 [percent]. And it’s
actually been happening for a while now; it’s just that every
year a few more of them slip down the risk curve.”

Emerging Trends in Real Estate® Asia Pacific 2018

As with those core funds now opting to adopt development
strategies, many opportunistic funds are today focused on
manufacturing an end product that can be sold to an institu-Chapter 1: An Embarrassment of Riches

Exhibit 1-5 Office Assets, Projected Compounded Annual Return, 2017–2021
Forecast total return

Average 10-year bond yield

Shanghai – Puxi
Shanghai – Pudong
Beijing – Overall
Sydney – CBD
Melbourne – CBD
Brisbane – CBD
Guangzhou
Adelaide – CBD
Seoul – CBD
Yokohama
NagoyaKuala Lumpur
Perth – CBD
OsakaSingapore – Marina Bay
Tokyo
Singapore – Shenton Way
Singapore – Raffles Place
Hong Kong – Central
Hong Kong – Overall
0%

1%

2%

3%

4%

5%

6%

7%

8%

Sources: Oxford Economics, Deutsche Asset Management, as of January 2017.
Note: RC = regional center; SRC = subregional center. Spread over sovereign bond is determined by projected income return plus capital appreciation.

tional buyer, be it a single-building asset or something in analternative asset class such as a data center. This strategy isespecially effective in destinations where there is a large gap
in values between Grade-A and Grade-B products, such as
Hong Kong, or where the local market has intrinsic inefficiencies that can be arbitraged to create products more alignedwith what end users are looking for. This includes South
Korea, where “the economy is very mature, but the realestate, physically, is quite old.”
The reason for the overall decline in opportunistic returns isagain a result of yield compression—as cap rates fall for all
the usual reasons, the risks that attach to the traditional 20
percent–plus opportunistic return profile have risen. As one
investor put it: “The big challenge is the continuous disconnect between the risk that opportunistic investors want toaccept and the returns they are looking to get. We still see
across almost all of our Asian markets that there’s not anappreciation for how much risk you need to take to get yourtargeted returns. The only way to mitigate that risk is to take areturn threshold that’s slightly lower on a risk-adjusted basis.

I think doing that puts you in a much better place, but it’s very
hard to convince people because of the pigeonholing mentality between core and value-add and opportunistic.”That said, plenty of opportunistic funds continue to target
traditional 20 percent–plus returns. Quite often, they are able
to do so because they have people on the ground with goodknowledge of local inefficiencies in particular markets or specific assets. Lateral thinking may be required. As one analyst
observed: “That’s opportunistic today—creative thinking
about how to enhance return.”
Again, however, there need to be idiosyncrasies in the market
that create differentiations to be exploited. As one interviewee
said: “We find we can get good opportunistic returns inmarkets that are not quite as transparent as others. In Japan,
for example, where things are not as clear on assets as theywould be in Hong Kong and Singapore, you can find theniche players willing to sell a piece of property a little undermarket to keep his name out of the papers sort-of-thing, andif you’re well positioned you can find that and get that plus-20

Emerging Trends in Real Estate® Asia Pacific 20187

[percent] pretty easily. But in markets that are very transparent
and everyone knows everything about anything, then returns
are significantly lower.”Core and Opportunistic Converge
on Value-Add
What all this means in practice is that a growing amountof capital from both core and opportunistic funds is now
converging on the value-add category. According to the
manager of one value-add fund: “What we’re seeing now isthat the value-add space where we’re active, unfortunately, isgetting more entrants, partly because some of the traditional
players in the opportunistic space are now moving down therisk curve. So, value-add is increasingly both a high-risk core
strategy or a low-risk opportunistic strategy.”
In some ways, this is a happy coincidence because there are
now increasing numbers of properties in Asia built around 15
to 20 years ago that can benefit from repositioning as partof a value-add strategy, providing exactly the type of asset
management play that can deliver target returns.
Old assets that are either out of date in themselves or whoseenvirons have evolved in ways that may allow assets to be repositioned are therefore something of a sweet spot in the market.
As the same value-add manager recounted: “We bought anoffice building two minutes’ walk from [Sydney’s] Barangaroo.
It’s an old building, and we’re going to do a lot to it. But thebuilding is out in the middle of nowhere, so no Barangaroo, no
project. And as you get more of these great premium Grade-A
developments in cities around Asia, and all this new infrastructure development going on, all of a sudden buildings that fiveor ten years ago were uninteresting become really interesting.
They’re old; you can do something with them.”

Exhibit 1-6 Investors’ Targeted Returns between Now
and End of 2018

6+34+179C
9%

At the same time, there seems plenty of growth left in somemarkets. An expectation that Australian assets will continue
to see strong rental growth over the near-to-medium term is
one of the main reasons they continue to be popular. Anothersource of long-term rental growth is likely to be in developing
economies. While these obviously involve more risk, institutional investors are increasingly willing to invest in emerging
markets provided they have the depth to absorb large
amounts of capital. For many, this means India. As one suchinvestor said: “We feel the real diversification offered by Asia
is to invest in emerging markets where there is a long-term,
sustainable, 3 percent to 5 percent rental growth profile overa long period. That’s the key characteristic; we don’t see thatanywhere else in the world.”
Exhibit 1-7 Asian Office Transaction Yields, 2011–2017
10
Sydney

8

6%

34%

34%

10%–15%

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

8

Another reason that there is now such a focus on using asset
management to deliver returns is that some investors have lost
confidence in rental growth to operate as a catalyst. Tokyo,
for example, has seen an exodus of foreign investors from theoffice sector for precisely this reason, and many analysts are
now projecting that both capital values and cap rates havereached a threshold in many Asian markets as a result.

0%–5%

17%

15%–20%Rental Growth Slowing?

Emerging Trends in Real Estate® Asia Pacific 20185%–10%

Yield (percentage)

Over 20%At the same time, as more capital drifts toward the midpoint,
the traditional differentiation between various investment
strategies has begun to break down, in the process creatinga new type of risk: “I think the lines between value-add andeverything else is thinning,” said one interviewee. “We see
people who say they’re in the value-add space who want toreposition an old decrepit mall. To me, that’s a much riskier
play than choosing a greenfield site to build an office building,but they say that’s in their 10 percent to 15 percent space. So,
the definition of what they say they want to invest in and therisk profile that they attribute to that is all getting very blurred.”

Seoul

Melbourne

6

4

2
2011

Tokyo

2012

Hong Kong

2013

2014

Source: Real Capital Analytics.
Note: Figures are 12-month rolling average.

2015

2016

2017

Chapter 1: An Embarrassment of Riches

Exhibit 1-8 Cities Most Likely to See Rental Growthin 2018

Exhibit 1-10 Reasons for Investing in Niche Sectors

12+16+192429C

Less competition fromother investors

decline no change increase
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22

SydneyMelbourne
Ho Chi Minh City
Shanghai
MumbaiShenzhenHong Kong
Tokyo
AucklandOsaka
New Delhi
Bangalore
Guangzhou
Bangkok
Singapore
Beijing
Jakarta
ManilaChina – second-tier cities
Taipei
Seoul
Kuala Lumpur

6.60
6.20
6.19
5.94
5.83
5.80
5.74
5.60
5.58
5.57
5.56
5.54
5.48
5.48
5.47
5.46
5.43
5.40
5.18
5.16
5.01
4.82

Demographic
demand drivers

13%

29%

16%

Stableincomereturn

19%

24%

Diversification

Higher yields

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

estate. If you can do that, you should be able to get an edge
on your margin than just buying a core office building—somewhere up in high single digits rather than low single digits.”

Note: Scored on a nine-point scale.

This year, the following types of alternative assets are gaining favor.

Alternative Assets Pick Up Steam

Data Centers

Another way for investors to boost returns is by migrating tounconventional asset classes, where competition is thinnerand yields higher. While this is not a new strategy, the shift
toward niche investments is more pronounced this year, withinvestors increasingly willing to take a punt in areas they previously avoided due to the perception of higher risk or the needfor specialist operational expertise. According to one investor:“You really have to find a good operator together with the realIn the past, this area was considered just too specialist. Today,
however, significant numbers of interviewees, including institutional funds, said they were willing to consider it, usually inpartnership with a professional operator. One reason for thisis that Asia’s data center market is quite fragmented, creating
scope for merger-and-acquisitions (M&A) activity. Supply/
demand dynamics are also positive, with current shortages
in regional capacity complemented by likely vast increases in

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

Exhibit 1-9 Data Consumption in Selected Asia Pacific Countries
200
181
China

India

Indonesia

Japan

Million terabytes

150

138
103

100

100
79

73
61
49

50
30

0

4 0 0 4

2011

6

1 0

2012

6

10

1 1

9

18

2013

15

46

40

33

23

17

27

2 1

4 2

7 3

11

5

7

11

2014

2015

2016

2017

2018

2019

15

2020

Source: PwC’s Global Entertainment & Media Outlook 2016–2020.

Emerging Trends in Real Estate® Asia Pacific 2018

9

China: Key Themes
Over the last couple of years (most recently in mid-2017),
the Chinese government has gradually tightened controls
over outflows of domestic capital in an effort to prevent
irresponsible investment in foreign markets. One unintended consequence of this has been to redirect a large
body of domestic funding originally earmarked for investment in international real estate back toward domestic
assets, making China’s already tight property markets
even tighter.

“A lot of investors are trying to figure out how to makemoney in China over the next five to seven years because
it’s going to be very different to how people have mademoney in the past ten years.” The residential space is nolonger an avenue for easy profits because margins haveshrunk dramatically in recent years, while in the commercial space, core assets have always been in short supply
because so much commercial stock is held on a stratatitle basis.

As a result, cap rates in first-tier cities compressed significantly in 2017, with Shanghai offices trading at around
3.5 percent going into the final quarter, according to JLL.
Investors active in Chinese markets reported sharply
rising asset prices. “Core office is on fire right now, yields
are trading as tight as we’ve ever seen,” said one fundmanager. “Overbidding is crazy,” commented another.
“Prices on the stuff we’re trying to do are just amazing—in the last six months, they’ve gone through the roof.”

This problem applies equally to opportunistic investors,
but has been amplified recently because, according to
one fund manager, China’s growing economic maturity
means there is now less differentiation between available
assets that can be used to arbitrage inefficiencies. “Thetheme in China has to be finding differentiation, because
the days of making good margins on building commodity stuff have passed. But the challenge with B-grade
office, for example, is that everything is good enough.
Infrastructure is fine, services are pretty efficient, things
work. So it’s much harder to find something that can berepositioned in a way that drives profit.”

Nor is pricing the only drawback for foreigners. Familiar
issues such as regulatory risk (now considered a “keydeterminant” by one interviewee), short lease structures,
tenant credit quality, tax liabilities, oversupply problems,and repatriation of profits continue to weigh on prospects
for international capital.
Beyond that, deals are becoming even harder to source
than they were. According to one foreign fund manager:

10

As a result, investors in general are searching further
afield for buying opportunities. These may include investments in alternative asset classes such as self-storage,
student housing, or data centers. Bigger players are buying at the entity level or partnering with local governments
in urban regeneration or new township developments. On

future demand as corporate data functions are outsourced,
new broadband infrastructure is rolled out, and consumers
ramp up use of cloud computing, big data, and the internetof things.

and the gradual loss of its manufacturing industries to other
Asian markets.

Development risk is decreasing as the sector becomes established as an institutional asset class. In addition, its specialist
nature is now seen as an asset because it keeps away thecompetition. According to one foreign opportunistic investor
adopting a build-to-core strategy: “The biggest program wehave going right now in China is data centers, where we’ve
backed a group to roll it out. There are a lot of barriers to entry,
which is one reason it’s more difficult to execute, but that also
keeps out a lot of competition, especially from local developers.”

Another alternative asset class beginning to gain traction
is affordable housing. The market here is seen as a low-tomid-income proposition because low margins available forpoverty-level housing have no appeal to investment funds.
The scope of opportunity is growing as prices of conventional residential properties across the Asia Pacific region
move beyond the reach of working-class incomes, and as
government policy initiatives begin to open up the market forlarge-scale construction.

Investors identified Hong Kong, China, India, and Singapore
as potential destinations, with projected internal rates of return(IRRs) of 13 to 15 percent. In particular, Singapore may moveto encourage creation of data center facilities given its longterm policy to reinvent the city-state as a tech-oriented hub

Most recently, authorities in Hong Kong launched a series ofmeasures aimed at jump-starting production of low-cost housing. According to one Hong Kong–based consultant: “There’s
going to be a shift in the power base, because hitherto developers have basically called the shots. They don’t see their roleas delivering any form of social housing, [so] you’re now going

Emerging Trends in Real Estate® Asia Pacific 2018

Affordable HousingChapter 1: An Embarrassment of Riches

a selective basis, some are also looking at second-tiercities that have now worked through their supply gluts.
Destinations in this category mentioned by China-based
interviewees included Chengdu, Wuhan, Nanjing,and Hangzhou.
That said, the problems identified above appear to be
more of a deterrent for opportunistic than for core capital.
This is reflected in the fact that, despite rapidly rising
prices, the value of deals involving foreign buyers in thefirst half of 2017—primarily big transactions in and around
Shanghai, where more than 60 percent of foreign realestate investment in China takes place—has remained
resilient at about a third of the roughly US$13 billion
deployed, according to JLL.
Why do foreigners continue to bid so aggressively?
In part, because growing numbers of limited partners
looking to allocate to China have placed capital in Chinaoriented funds, and managers are now deploying it. In
addition, the overall shortfall of available assets acrossAsia means that core investors are now increasingly turning to China to place capital, at least partly on the basisthat higher risk and cost of capital are offset by potential
upside, quite often in the form of build-to-core development plays.
According to one fund manager: “Basically, you’re forced
to say, okay, I’ll fund a development program so that I can
get access to the stock and be in for the long term. I think
to call it ‘core’ on that basis would be a stretch, but as ato see a more proactive policy with developers told to provide,say, 35 percent of units in the form of affordable housing, as
in London and New York.” Several developers in Hong Kong
have seen the writing on the wall and are now offering up suitable sites for new projects. This model is also already in placein China and now appears likely to be implemented elsewherein Asia.
In Indonesia, the government is on track to build some
900,000 affordable housing units (at average sales prices
of around US$33,000 each) in 2017, following completionof some 700,000 the previous year, mostly in low-density
projects about 25 to 30 kilometers from city centers but nearinbound rail lines. Subsidized deposits and/or financing areavailable. One local developer reported IRRs north of 20
percent with a two-times equity multiple, though these may
not be universally available. According to an investor with aforeign fund: “Returns are very low—once you deal with alocal partner they’re really in the mid-single digits, which ismore Asian Development Bank than private equity returns.”

firm we agree that manufacturing core income streams
is a better place to be in the risk curve than buying
them today.”In doing so, investors are not only hitching their wagon to
the train of apparently never-ending capital appreciation.
They are also tapping the appetite of cash-rich Chinese
insurance companies that are barred from participating
in development but have enormous appetite for acquiring
completed prime real estate. By some estimates, Chinese
insurers are set to bring an additional US$90 billion in
new capital to China’s commercial real estate market
by 2020.
For domestic investors, meanwhile, the playing field isuneven. With big institutional players competing intensely
for the limited supply of prime assets in first-tier cities,
other local investors—including a growing number ofdevelopers now branching into asset management as
development margins decline—are looking to projects inoutlying areas of big cities. They are also turning to second- and third-tier city projects, although these locations
often have ongoing issues with poor liquidity and chronic
oversupply. Increasingly tight financing conditions continue to drive consolidation within the industry as smaller
players become acquisition targets. This is generally aplay open only to larger domestic developers, although
there may be scope for foreign investors to partner witha local operator.

India is another market where government-backed programs
envision the creation of millions of new units. Affordable housing projects were granted “infrastructure status” by the central
government in early 2017, providing access to lower financing
costs and tax exemptions, and boosting interest from institutional investors. The supply of newly constructed affordable
homes in India increased 27 percent year-on-year in the first
three quarters of the year to some 26,000 units, according tobrokers Cushman & Wakefield.
Despite the advantage of growing government support,
however, investors remain cautious about affordable housing
as an asset class. One problem is that producing the vast
numbers of new homes being talked about will require equallyvast reserves of land on which to build—a resource that iseither too hard to find, too expensive, or so far away from city
centers that people don’t want to live there.
Another is that government participation can be as much of ahindrance as a help. One institutional fund manager commented he would prefer to see the sector stand on its own
Emerging Trends in Real Estate® Asia Pacific 201811

Japan: Key Themes
The aggressive program of quantitative easing introducedby the Japanese government in October 2012 proved tobe the launch pad for a multiyear bull run in Japanese
asset prices that has resulted in a long period of sustained
growth in rents, capital values, and values of real estate
investment trusts (J-REITs). With profits boosted both bycap rate compression and high levels of gearing provided
by local banks, many local and foreign investors havemade huge profits in the years since 2012. One core fundmanager, for example, reported IRRs “north of 28 percent”
for a recently divested office portfolio.
However, despite positive business sentiment, strongtransaction volumes, and a relatively robust annualized 2.5
percent GDP growth in the second quarter of 2017, market
momentum in Tokyo seems to have ebbed, with many
interviewees expecting transactions to decline as J-REIT
purchasing slows and funds take a more cautious view ofthe market.
There are at least a couple of reasons for this. First andforemost, with rental growth flatlining and office yields
compressed to under 3 percent, many investors have concluded that the cycle of easy money is over. At the sametime, in an environment where supply continues to tighten
as both domestic capital and foreign capital compete fora shrinking pool of available assets, landlords have little
incentive to lower prices. As one locally based investor
commented: “There’s not a lot of stuff out there, and there’s
no pressure from the banks or the government for anyone
to sell. So, there’s now a growing bid/ask disparity, particularly for office, because a lot of sellers think there’s stillgoing to be great rent growth even as buyers are now moreconservative about that scenario.”

merits without the benefit of government subsidies before hewould consider investing. Another India-based consultant
feared how government red tape might affect profits: “Theapproval process is still not a single window and the challenge is that you are not necessarily playing on margins,
you are playing on volumes. When you are delivering tens of
thousands of homes every year, your entire value chain has towork in a well-oiled manner—you don’t have time for overruns
that are beyond your control.”MultifamilyWith home prices across the region moving increasingly outof reach, the need for long-term rental housing stock is grow12

Emerging Trends in Real Estate® Asia Pacific 2018

Problems in the office sector have been compounded byconcerns of oversupply, with a big pipeline of new space
set to arrive by 2020. Overall vacancies appear tight atunder 4 percent, but in newly developed buildings they
are running at almost 30 percent, according to estimatesby Deutsche Asset Management, suggesting that in theabsence of more meaningful economic growth, occupancy
of older buildings will be at risk as tenants migrate to the
new supply.
One result of diminishing return expectations is that investor attention is now shifting toward a focus on yield rather
than growth. From this perspective, Japan is an attractive
market for institutions to park funds because, at around
3 percent, the yield spread (i.e., between the yield on theasset and that of the Japanese sovereign bond) is probably the widest in Asia. As a manager at one institutional
fund observed: “You get maybe a 4 percent rental or NOI[net operating income] yield and then on top of that you
can borrow money today at less than 1 percent. So, youhave this big margin, you’re not levered, and cash yield isaround 7 percent to 8 percent—that’s very rare to find on astabilized income profile anywhere in the world.”
What this means in practice is that many fund managers
are also now shifting their focus in terms of asset class.
According to one: “We’ve now moved away from office andhave expanded our expertise to residential because we
feel going forward that Japan will be a low-inflation, lowgrowth, and low-interest-rate environment, and as such we
prefer to invest in an asset class with lower volatility.” Whileopinions vary over prospects for residential rental growth
given a lack of wage inflation, competition in this space has
seen residential transaction yields in Tokyo—which stoodat around 6 percent only three years ago—decline “froming. This is a sector with obvious appeal for yield-oriented
institutional investors both in Asia and globally, but because
Asian markets (apart from Japan) have no history of build-torent as an asset class, investors are now casting around for a
viable business model. As one fund manager said: “We put
it in the same category as retirement housing—conceptually
the demand is there, it makes sense, but we haven’t figuredout how to make money doing it yet.”
In China, both foreign and domestic investors—including
some of the country’s biggest developers—are actively
working to establish operating platforms, mostly targeting ayounger demographic of single or double occupancy. One
foreign fund now active in this area has establishedChapter 1: An Embarrassment of Riches

Exhibit 1-11 Volume Accelerates in Regional Japan70%$10
Regional share of Japanese volume

60%
50%

Regional volume

$6

40%

Share

Volume (US$ billion)

$8

30%

$4

20%
$2
$0

10%
’07

’08

’09

’10

’11

’12

’13

’14

’15

’16

’17

0%

Source: Real Capital Analytics.
Note: Figures are for deals above US$10 million, development site included.

high-3s into the 2s over the last six to nine months,” according to one interviewee active in the sector.
In addition, concerns about supply shortages also are
emerging. According to one longstanding buyer of Tokyo
residential: “Transactions are down. We’re now buying
portfolios, but they’re smaller assets. We typically boughtlarger assets until about nine months ago, but either they’reno longer available, or when they are they’re priced higher
because sellers know there aren’t a lot out there.”
Meanwhile, those more focused on higher yields are looking increasingly to secondary cities. The migration of funds
out of Tokyo (in particular to Osaka and Fukuoka) picked up
significantly in 2017, with Japan’s five major outlying destinations now accounting for more overall transaction volume
than Tokyo, according to CBRE.
This has led to increased competition and rapid compression of yields, however, as capital values soar. At thea Mainland platform based on a portfolio of older office buildings or retail podiums it master-leases for ten to 20 years. This
offers a much cheaper approach than buying the underlying
land. The buildings are then converted into studio apartmentsof about 22 to 25 square meters and sublet at US$400 to
US$500 per month.
As a manager at the fund explained: “The demand is hugebecause the rental class in China is measured in the hundreds of millions, but I think the concept of what multifamily isand how it’s deployed will be very different from what it’s beenin the U.S. and Japan. And it’s not easy—most real estate
funds work building by building, but one of our platforms has
close to 30,000 rooms spread across 250 sites. So, the bigger

beginning of 2017, the yield gap between office assets inTokyo and outlying cities was at least 100 basis points,
according to RCA, but that differential is now shrinking,meaning the comparative advantage of secondary cities
has diminished significantly.
On the residential side, according to one investor, positive
supply/demand dynamics combined with a lower basemean rents have greater potential to rise in secondary cities.
But as more funds shift their focus outside Tokyo, yields arecompressing rapidly. According to one fund manager: “Westarted buying residential in Osaka about 18 to 20 months
ago. We got some deals done, but people have been very
aggressive and the market then moved so quickly—froma 5-cap to 4.5 to low-4s—that we started to get priced out.
And when that happens, it’s not a good scenario because
once you’re on that train chasing it down, at some point
you’re buying based on Tokyo prices. So, Tokyo at 4.2 or
Osaka at 4.2? It’s not a hard decision to make.”focus is operational—creating a standardized model, being
able to scale management teams. It may be easy for ten sites,
but much harder for 100 to 200.”
High taxes, rental yields as low as some 2 percent, andthe lack of any formal legal structure in China that caters
to a build-to-rent model were cited as obstacles to morewidespread adoption of multifamily projects by institutional
investors. Nonetheless, momentum is gathering, in particularon the political front. Recent government-backed programs
feature cut-price land parcels zoned for development as rental
apartments, as well as allowing rezoning of commercial andrural land into for-rent residential purposes.

Emerging Trends in Real Estate® Asia Pacific 201813

Exhibit 1-12 Residential Assets as a Percentage of Institutional Real Estate Portfolios, 2015
Switzerland

47%

Netherlands

46%

United States

25%

Japan

19%

Finland

18%

France12%

Sweden12%

Germany

12%

Denmark

10%

Canada6%

United Kingdom

4%Asia ex-Japan 0%
Sources: IPD, NCREIF, LaSalle Investment Management.

The Chinese government also seems intent on creating afinancing framework that will allow developers to spin off
low-yielding residential assets they are currently obliged bylaw to hold and manage as rental properties. In October 2017,
Chinese regulators approved the issue of some US$750
million in asset-backed securities (ABS) by a major domestic
developer backed by rents from a portfolio of its rental apartments, with a coupon of 4.88 percent. While it remains unclear
how the properties could justify such an apparently high yield,
this is likely to be the precursor for many more such ABS
issues, with authorities seemingly intent on using the ABS
framework (and possibly also a REIT-based framework) to

Exhibit 1-13 Niche Sectors in Which Investors Are Now
Active or Plan to Be Active

6+9+111416C
Self-storage

Senior housing

Resorts

16%

6%

9%

11%

Affordable
housingDatacenters

16%

promote the evolution of a nationwide institutional residential
leasing platform. This would be the first listed implementation of a major ABS facility for Chinese real estate assets, andindeed the first significant move in Asia apart from an ill-fatedJapanese excursion into mortgage-backed securities in the
run-up to the global financial crisis.
The build-to-rent concept is also gaining ground in Hong
Kong, where the world’s highest home prices have consigned
increasing numbers of young people to rental housing. One
locally based value-add manager, describing his model as“student living for young professionals,” outlined a strategy
similar to that used in China, with super-small footprints ofaround 20 square meters complemented by shared communal and dining areas in city-center locations.
The main problem is that Hong Kong has very little en bloc
stock available for conversion to multifamily use. “Even if you
can find a whole en bloc residential building or at least theupper floors of a residential building, quite often you’re competing with developers to buy it. Beyond that you’ve still got to
pay stamp duty, which is 23.5 percent. So, it’s quite challenging to find the raw product to do a multifamily strategy.” As aresult, some investors are now looking at purchasing hotels,
especially pencil-building Grade-B boutique hotels that canbe converted to a residential strategy.

14%

Business
parks

14%

14%

Student housing

Shared/serviced offices

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

14

Emerging Trends in Real Estate® Asia Pacific 2018

Hong Kong’s strata-title issue is echoed in other markets
across the region, including Australia, where many institutionalbuyers are now looking to create build-to-rent strategies.
A further stumbling block is that returns for this emerging
asset class strategies are usually inferior to those of a stan-Chapter 1: An Embarrassment of Riches

dard build-to-sell approach. According to a fund manager inAustralia: “Multifamily is very much a focus at the moment, but
the trouble is making it stack up, because from a developer’s
perspective, the best return on investment is to strata-title
the project and sell it. In fact, you can’t even get it financed
until you’ve sold 60 percent or 70 percent off the plan. So
it’s difficult to see how developers can buy land, build a big
apartment building, and then sell it profitably to an institutional
investor. The yield to the investor is about 3 percent gross—it
simply can’t compete with 4.5 percent to 6.5 percent fromretail and industrial assets.”
Australia’s low-yield problem is shared by China, where rental
yields on residential properties are currently as low as 2 percent—significantly below those for build-to-sell development.
The same does not apply in Japan, however, due to the lowinterest rates charged by Japanese banks. As one interviewee
commented: “When I look at risk/return, Japan still stands out
compared to Australia, where the yield is comparable to theborrowing cost of 3.5 percent to 4 percent. So, the margin
isn’t good enough, or at least not comparable to somethingin Japan, where margin arbitrage is significantly higher thanprobably anywhere else in the world.”

Student Housing
Another niche area where Asia Pacific investors have been
active for some time is student housing. The focus regionallycontinues to be on Australia, where international student numbers are booming and inner-city student housing has been an
institutional asset class for several years.
However, while relatively few stabilized assets have so far
traded in this sector, the problem is that yields have alreadybeen bid down to what seem very compressed levels.
According to one fund manager: “Like everything else,
student housing yields are getting really competitive. I’ve had
three or four people who have come to me wanting to build
portfolios of student dorms in Australia, and they’re building
to single-digit development yields, which is historically very
low for all the risk you’re taking. So, if you put a 10 percent
contingency on your cost, and you’re underwriting a yield thatis less than 10 percent, then, if your contingency goes, sodoes your yield.”
Exhibit 1-14 Forecast Yields for Australian Student Housing
LocationYield range

Melbourne
SydneyBrisbane
AdelaidePerth5.50%–6.25%
5.50%–6.25%
6.75%–7.25%
6.75%–7.25%
7.00%–7.50%

Source: JLL.

Investment activity in education-led real estate elsewherein Asia has historically been quite weak, but it has recently
picked up in Far East markets such as Hong Kong, South
Korea, and Japan. One investor spoke of investments in tutoring schools in Hong Kong and Seoul whereby the real estateis leased to an established tutoring operator.

Senior Housing
For years, investors have been hunting for a senior housing
strategy that will work in the Asian context, given the region’s
aging demographic and the fact that so many younger people
now have full-time jobs that prevent them looking after aging
relatives. While the search for a business model continues, it
is probably fair to say that institutions are now closer to finding
a solution for the simple reason that rapid economic and property price growth has left older generations in Asia far better
off—in terms of both liquid and property-based assets—than
they were in the past.
Australia, as the most Westernized market in the region,
has made the most progress toward a workable formula.
According to one Singapore-based fund manager, the optimal
profile is a somewhat younger, healthier demographic thatcan be housed in an independent living facility, for which heassessed an annual demand in Australia of around 28,000
units, compared with current supply of around 8,000 units,
mostly of poor quality: “The opportunity is to build apartmentstyle upscale accommodation for seniors who are generally
asset-rich but cash-poor, who can sell down their house, live
within their existing catchment, and be connected to family and friends,” he said. In addition, the fund was targeting
aged-care facilities (i.e., nursing homes) as part of a core
investment strategy. This would be structured on a leaseholdbasis in partnership with an established operator in order toavoid operating risk.
Investors elsewhere in the Asia Pacific are looking to adopt
similar models, leveraging the growing spending power of anincreasingly well-off demographic. So far, however, they have
yet to find the right formula. According to one interviewee:“We’ve looked at this sector heavily and as a firm we’ve
invested quite a bit. But the reality in China is that no one has
the model. Is it a for-sale model or membership model ormonthly rental model? So they’re still grappling with the modeof delivery. And to that point, I don’t think there is one operator
in the country that has profitable sites.”
In Japan, the details differ, but the outcome is much thesame, despite a generally wealthier population. According to
one Tokyo-based investor: “The operators are the issue here
because senior housing in Japan has historically been built
for inheritance tax–avoidance purposes. Each senior housing
unit in Japan is pretty small, maybe 40 or 50 units per building, and is run by mom-and-pop operators. It’s very difficult
Emerging Trends in Real Estate® Asia Pacific 201815

for institutional investors to invest in such small facilities, especially when operators are not so mature.”

The Coworking Juggernaut
Few trends within the commercial real estate world havetaken off as quickly as coworking. Only 24 months ago, mostpeople in the industry had never heard of it. Today, it is taking
the office sector by storm, with coworking operators the biggest source of demand for new office space in many major
cities both in Asia and throughout the world.
Although the implications for landlords and investors arehuge, the fact that the trend is occupier-led means many
landlords have been slow to embrace change. According to
one analyst: “These days, investors are increasingly coming
to us not to ask about yield or rents, they want to know aboutbuildings’ occupiers—who are they, what are they thinking,and what are their space requirements?” This is becausesome investors, especially those from core funds, prefer toavoid tenants from industries that may be prone to disruption.
“They know tech disruption is happening from coworking andalso in the financial industry, where there have been a lot oflayoffs because of fintech [financial technology]. So, they may
not want a big concentration of bank and tech companies intheir properties. The way they see it, one minute they sign athree-year lease, then the cycle passes, the company goesbust, and they’ve lost two floors. At least if they have more law
firms, which use traditional layouts with cubicles, they think thedemand will be there.”This logic is questionable, however, firstly because ongoing changes to office use and configuration are probably
permanent, and secondly because tech continues to growas a component of tenant bases across the region. Currently
accounting for around 17 percent of Asian Grade-A space,
Exhibit 1-15 Coworking Cost Savings Based on a Hong
Kong Example
US$16,336
US$1,200
US$12,373

25% SAVINGS
US$4,000
Other costs (admin, officeoccupancy, expenses)
US$11,136

Set-up costs (fit-out legal)
Rent
Annual desk cost

Flexibleworkspace

Traditional
officeSource: Colliers.
Note: Based on 120 square feet per person, three-year traditional office lease, HK$60 per
square foot per month (US$93 per square foot per annum).

16

Emerging Trends in Real Estate® Asia Pacific 2018according to JLL, tech firms are muscling into CBDs that havelong been dominated by traditional tenants in order to attract
talented staff and as workforces of banks and other conventional tenants are hollowed out by advances in fintech andartificial intelligence.
Other issues also point to rising demand for modernizedworkspaces:
●●

●●

●●

Open-plan layouts use space more efficiently, thereby
cutting costs.
Evolving workplace technology and greater use of outsourced labor create uncertainties about staffing needs
that in turn generate demand for flexible workspaces toabsorb worker spillover, either temporarily or permanently.
Finally, according to another analyst, early adopters ofmodern layouts benefit from an intangible sense that“they add to the style and feel of the building, generating brand building—both online and the physical brandinside. And if that helps to attract millennial talent, it’ssomething occupiers and investors want.”

Most interviewees agreed that embracing the future now ispreferable. As one said: “We’ve never seen change at the
speed we’re seeing now. So how do you respond to that, or
how at least do you allow yourself the margin to be able torespond? It’s as if ultimate flexibility, whether it’s physical or
financial, is the overriding theme.”

Demand/Supply Imbalance
There is no doubt that the speed of ongoing change in theoffice space creates significant risk. The major questions are:how to strike a balance between unconventional and traditional use, and how to create leasing structures that workfor everyone?
As to the first issue, oversupply problems for coworking
operators may well be looming given that the sector’s explosive growth has obscured the true extent of user demand, forboth operators and users. As one fund manager somewhat
cynically observed: “I see coworking spaces as little morethan a purgatory for staff because eventually I have a feelingthey’re all going to be let go anyway, and everyone will just be
chasing around for whatever contract they can get from theirprevious employers.”
The supply/demand issue also leads to a risk/reward question: should landlords move now to adopt operating risk?
The traditional mentality, as one fund manager put it, is that“they’re paying us a rent, and any profit they get from theirtenants over and above that is their own business.” But whilelandlords are generally reluctant to accept the industry’s shortChapter 1: An Embarrassment of Riches

Exhibit 1-16 Asia Pacific Office Capital Values, Second Quarter 2017
US$ per square meter

Hong Kong
Tokyo
Singapore
Taipei
BeijingShanghai
SydneySeoul
Guangzhou
Osaka
Melbourne
Brisbane
Auckland
MumbaiHo Chi Minh City
JakartaBangkok
Delhi NCR
ManilaKuala Lumpur
Bangalore$66,730$28,250$17,668$17,098$15,838$14,545$14,340$11,095$9,919$9,881$9,712$6,261$6,220$5,253$5,107$3,465$3,450$3,310$2,656$1,909$1,734

Source: JLL (Real Estate Intelligence Services).

Exhibit 1-17 Asia Pacific Grade-A Net Effective Rents, Second Quarter 2017
US$ per square meter per year

Hong Kong
BeijingShanghaiTokyo
Singapore
SydneyTaipeiMumbaiSeoul
Ho Chi Minh City
Guangzhou
Auckland
Osaka
Delhi NCR
Jakarta
Melbourne
ManilaBangkok
BrisbaneBangalore
Kuala Lumpur$1,925
$994
$830
$819
$628
$550
$513
$504
$493
$465
$433
$384
$346
$295
$270
$256
$237
$226
$203
$179
$126

Source: JLL (Real Estate Intelligence Services).

Emerging Trends in Real Estate® Asia Pacific 201817

Australia: Key Themes
Markets in Australia are some of the few in the Asia Pacificto have bucked the trend of slowing rental growth, witheffective rents for Sydney prime offices rising an annualized 25 percent (Melbourne 16 percent) in the second
quarter of 2017, according to JLL. Strong fundamentals
in both cities have been boosted by declining incentives,
limited incoming supply, and the withdrawal of significant
numbers of CBD buildings from the market.
Going forward, positive supply/demand dynamics should
help maintain pressure on yields, which have moved to
sub–5 percent in both Sydney and Melbourne. Although
cap rates are now below 2007 lows, asset pricing in
general is not that high by Asian standards, leading to
expectations of healthy IRRs if—as expected—rents andcapital values continue rise. According to one investor:“Sydney is crazy. I can see it being a long cycle because
there is no release valve—nothing is being created, andanything that is [created] will be ages away.”
Given also the high yield spread to sovereign bonds,
Australia remains a firm favorite among foreign investors(accounting today for more than 40 percent of domestic
investment activity), with Sydney and Melbourne topping
this year’s Investment Prospect Rankings. According
to one Singapore-based manager: “Borrowing costs inAustralia are a bit higher, but it still looks interesting if
you’re looking for strong cash-on-cash returns because
it’s probably the only market in Asia where you can not
only buy assets with very long leases, but also underwrite
annual escalation of between 3 and 4 percent.”

leases and proposed profit-share arrangements—with aneye, no doubt, to the reality that many operators are losing
money—they must also calculate if they really want to cede
the initiative to operators just as such a major evolution of
workplace use is being rolled out, especially when coworking providers have already been such huge disruptors in theoffice space.
The alternative would be for landlords to create dedicatedcoworking spaces in their buildings for lease to tenants oranyone else. According to one analyst: “Most tenants would
probably prefer landlords to provide whole floors as coworking spaces because it gives them flexibility—they know that if
they run out of space [in their own offices], they can just thengo there to work. It’s a value-add proposition for tenants, and I
think it’s a better solution for landlords than leasing out spaces
to coworking companies. But at the moment, investors are justnot thinking ahead.”

18

Emerging Trends in Real Estate® Asia Pacific 2018

As ever, however, the big problem is actually finding
properties to buy. Transactions in the first half of 2017
were down 37 percent on previous-year figures, according to CBRE, mainly because owners are reluctant to sellwhen there is little else to buy if they do. About one-thirdof activity came from foreign funds, slightly down on previous years.
Meanwhile, investors are adopting a number of strategies to get capital into the market, including build-to-core
and forward-funding strategies. An upcoming problem,
however, is that development opportunities in Sydney
and Melbourne CBDs are likely to dry up. As one Sydneybased fund manager observed: “I think historically thechallenge has been putting sites together. A lot of thesmaller buildings in the CBD have been strata-titled,which makes it hard to consolidate sites to provide
somewhere with a floor plate big enough to be attractive
to tenants. So at the moment, we can’t see any more sites
available where you can actually undertake this type oflifestyle redevelopment—the ones we are seeing at the
moment are pretty much it.”With more buyers than sellers in CBDs, many investors(including foreigners) are now willing to move out from thecenter. Parramatta, for example, a suburb located 23 kilometers west of the Sydney CBD, was described by one
locally based fund manager as a “future alternative CBD
in Sydney.” Another described it as a “great market withcheap rents and strong near-term rental growth.” The riseof this type of outlying business district is expected toVietnam and India Rank as Most Popular
Developing Markets
Developing markets continue to draw interest. In previous
reports, a succession of emerging-market cities—in particularBangalore, Jakarta, and Manila—occupied top positions in
our investment prospect rankings. This year, only one—Ho
Chi Minh City—stood out, as sentiment elsewhere declined.
In particular, Indonesia continues to suffer the effects of an
office supply glut. Still, prospects in Jakarta are not universally
negative. According to one locally based developer, newpremium office projects have no problem finding tenants aslong as they are centrally located and near light-rail transit(LRT) lines. Rents are down, but these properties will be well
positioned once the market turns. The same applies on theresidential side.

Chapter 1: An Embarrassment of Riches

continue as city centers fill up and infrastructure—especially transportation networks—improves, given especiallythe large deal sizes on offer.
After years in the doldrums, activity is now also picking up
in Australian secondary cities, where fundamentals havebegun to turn. Brisbane (together with areas along the Gold
Coast) has probably the best prospects, with projected 16
percent effective rental growth for 2017–2018, according to
CBRE. At the other end, rents may have bottomed in Perth,but investment activity remains very limited.
Alternative asset classes are another area seeing significant investor interest, once again in line with other regional
markets. In particular, student housing has become firmly
established as an institutional asset class in Australia,
while senior housing seems finally to be gaining critical mass. Both were repeatedly mentioned as potential
investment targets in interviews.
In addition, logistics assets remain a draw for both local
and foreign players. Fundamentals remain strong andtransactions (including portfolio sales) have continued to
track at high levels, drawn by yields that are compressing
but still average around 6.5 percent, according to JLL.
According to one foreign investor: “It ticks the boxes forthe institutional investor mainly because of the freehold
nature of the property. At the industrial end [in Singapore],
we tend to get short leaseholds, so that’s what’s driving
it. But on top of that, [in Australia] we get longer commitments from tenants and step-ups in the rentals, which isa standard operating procedure. Add in the government

and the transparency and it’s far better than the othercountries we have to choose from right now.”
In the residential sector, prices continue to rise despite
government efforts to stem the tide. Sydney’s housing is
now the second most expensive in the world, registering
12.2 times average incomes (9.5 times average incomesin Melbourne), according to analysts Demographia.
Various regulatory measures have been adopted, including punitive taxes on foreign buyers, who now represent
some 25 percent of all home purchases in New South
Wales, according to Credit Suisse. The measures havedone little to blunt rising values, however. Interviewees
expected that prices would continue to rise.
Exhibit 1-18 Foreign Purchases of Australian
Residential Property, First Half 20177+2+3484C
Other

China

United Kingdom 1.3%
Indonesia 1.5%

9%

87%

New Zealand
1.6%

1.6%

Sources: New South Wales Office of State Revenue, Credit Suisse.

The Philippines, meanwhile, remains a healthy market, withboth rents and capital values continuing to trend upward amid
an infrastructure boom and economic growth of some 6.5
percent. However, concerns over U.S. base rate increases,
together with domestic political issues have been a drag on
sentiment among foreign investors, as have longstanding difficulties in finding good local partners with whom to work.
In Vietnam, investors continue to draw favorable comparisonswith the China of ten to 15 years ago. GDP growth is in thearea of 7.4 percent, and while bureaucracy remains an issue,
the regulatory environment is becoming slowly less restrictive. Notably, our survey ranked Ho Chi Minh City among thehighest in terms of rental value growth, reflecting confidence
that economic strength will spill over to property values.
Unsurprisingly, Vietnam remains very much a development
story, although the number and size of opportunities tend to
be relatively small.

Very little prime office stock has been built in recent years,
meaning very few stabilized assets are available to buy. Thatleaves the residential sector as the default play for most investors, usually in conjunction with a local joint venture partner.
According to one fund manager: “There’s been a general
recovery economically, but asset levels have not lifted to pre–global financial crisis levels as in other markets. So we see
strong growth prospects from a macro perspective. Our entry
point there is mid-to-affordable residential housing, which has
a natural exit. It’s very demand based. That’s a strategy we’re
executing on now.”
The other developing-market story now proving a draw forinternational investors is India. While Indian cities did notfeature prominently in this year’s investment prospect rankings, probably because of ongoing qualms over operationaldifficulties, strong flows of institutional and sovereign wealthtype capital have continued. Like Vietnam, investment in India

Emerging Trends in Real Estate® Asia Pacific 201819

Exhbit 1-19 Ho Chi Minh City Total Grade-A Office Supply
2,550

Thousand square meters GFA

2,500
2,450
2,400
2,350
2,300
2,250
2,200
2,150
2,100
2,050

1Q

2Q
3Q
2015

4Q

1Q

2Q

3Q
2016

4Q

1Q
2Q
2017

Source: CBRE.

tends to be strategic in nature, aimed at front-running longterm economic growth resulting from reforms being rolled out
by a popular government intent on tackling India’s enduring
inefficiencies. Unlike Vietnam, however, India offers massive scale, a factor that makes it especially popular for funds
deploying large amounts of capital.
Incoming flows have so far been dominated by the big players, but smaller funds are now also lining up. As one fundmanager observed: “There’s a real gap between the largeLPs [limited partners] who are comfortable going alone, andthe LPs who have traditionally backed funds—it’s probably
the market where we see the biggest gap between registeringinterest and actually doing something. So there’s a significant
amount of tire-kicking going on.”
Most international investors in India continue to prefer commercial property, with cap rates currently averaging in therange of 8.5 to 8.75 percent. Over the last few years, various
large global opportunistic and institutional funds have madebig commitments to the Indian office sector—mainly in theform of business parks, and many of these early entrants are
now either consolidating their holdings or looking to exit via
India’s nascent real estate investment trust (REIT) market,
which is likely to see its first initial public offering (IPO) in thefirst quarter of 2018, according to several interviewees. With
most high-quality preexisting assets already accounted for,international funds are turning increasingly to build-to-coreprojects. One recent strategy is to tap land banks of local
corporate owners in tripartite joint venture arrangements withdomestic developers.

20

Emerging Trends in Real Estate® Asia Pacific 2018

India’s logistics sector has recently been the target of aninvestment boom, largely due to tax reforms. In addition,
retail assets also are now a popular play, with a number ofplatform or portfolio deals either already completed or in theworks. According to one Delhi-based consultant, this is not
only because office assets have already absorbed so muchcapital, but also because retail is starting from a lower basein terms of both asset quality and rental levels, providing
investors better growth prospects: “In most of the retail malls
countrywide, the average appreciation in rentals has been
anything between 8 percent and 10 percent per annum, ascompared to the office space, where rents have been more orless steady, growing at 5 percent to 7 percent per annum.”
The residential space, meanwhile, continues to suffer froma developer base regarded as both financially weak andgenerally unreliable—issues that in the short term havebeen exacerbated by a raft of recent government reforms
that include a demonetization campaign aiming to eliminate“black” (i.e., under the table) money, a new services tax, andincreased regulation of real estate development practices.
According to one investor: “All these things have createdshort-term sentiment issues, but now, I think, and certainly inthe more affordable workforce housing space, we’re seeing
sales in our projects pick up quite nicely, so it does look likeit’s working. At the higher end, though, it’s still very slow.”
High-end residential oversupply is another ongoing problem,
leading most foreign investors to shy away from the sector
altogether. As one fund manager said: “I think you need tomore intimately understand the market to do residential in
India. The bigger guys doing direct joint ventures seem tohave had more traction on the office side—it’s just easier toget scale.” And, according to one locally based interviewee:“Residential today is no longer a core focus area for any of
the foreign investors. So the money continues to flow in, but
a lot of the foreign guys are looking at office space development, trying ideally to forge preferred relationships with Indiandevelopers to create platforms.”

Investors Still Bullish on Retail . . .
The downfall of so many shopping malls in U.S. markets provides a sobering vision of what might happen in Asia shouldcompetition from e-commerce continue to eat away at market
shares of regional shopping centers. Perhaps surprisingly,
though, opinions on the prospects for retail in Asia werequite polarized.
On the one hand, many interviewees remained sanguine
about the ability of conventional retail to fend off online

Chapter 1: An Embarrassment of Riches

Exhibit 1-20 Retail Assets, Projected Compounded Annual Return, 2017–2022
Total return

Average 10-year bond yield

Sydney – SRC
Sydney – Neighborhood
Melbourne – SRC
Kuala Lumpur city center
Sydney – RC
Seoul
Melbourne – RC
Shanghai – Prime
Beijing – Core
Hong Kong – Overall
Guangzhou – Prime
Singapore – Suburban
Tokyo
Singapore – Prime
0%

1%

2%

3%

4%

5%

6%

7%

8%

Sources: Oxford Economics, Deutsche Asset Management, as of January 2017.
Notes: RC = regional center; SRC = subregional center. Spread over sovereign bond is determined by projected income return plus capital appreciation.

challengers, pointing out that industry fundamentals remain
generally strong, with rents and capital values trending either
flat or upward across the region, and with analysts expecting
healthy returns going forward. Poorly performing markets likeHong Kong and Singapore, meanwhile, are more a reflectionof lower inbound tourism than a marked shift to e-commerce.
One reason for the optimism is that the retail industry in many
parts of Asia remains immature: “It’s like a teenager,” said
one retail developer: “Growing fast, changing fast, and quite
unsure of what to do.” This means there are inefficiencies in
the way Asian malls are built and operated that create potential for savvier operators to differentiate their own products.
Another reason is that shopping centers in Asia do not generally use the department store anchor model that has been thedownfall of so many malls in the United States. Offerings tend
to be fresher. Beyond that, many big facilities are being reinvented in an effort to protect themselves from e-commerce
challenges. “We just did a big renovation in a shopping mall
we own in Singapore,” continued the fund manager. “About
30 percent of that was already supermarket, and then weboosted the percentage of food and beverage, which is pretty
immune to e-commerce, from 20 percent to 30 percent offloor space. So that’s what you want to have—services thatpeople can’t get online.” While these types of tenants generally pay lower rents than fashion outlets, the hit to the bottom
line seems acceptable to most landlords.
A further point of differentiation is that investors in Asia havemore options in finding assets that are less affected by e-commerce competition, in particular neighborhood or regional
facilities. This is partly because this type of asset carries ahigher proportion of nondiscretionary items consumers don’t
buy on the internet. In addition, the resilience of neighborhood
centers is a byproduct of Asia’s high rates of urbanization, withcities continuing to expand outward as migrants are drawn tourban areas. In China, for example, some cities are expanding
so quickly that entirely new townships are springing up in city
suburbs, providing captive consumer audiences that require
their own dedicated shopping facilities.
Neighborhood malls are also seen as a haven in Australia,
though for different reasons. The recent arrival in the countryof e-tailer Amazon will likely jump-start a long-term boom in
online shopping, but big distances between warehouses andcustomers based outside major cities mean that e-commercedeliveries will be both slow and expensive, slowing growth.
While some interviewees did voice doubts about the future oflarge malls in Australia, this was more because they consid-

Emerging Trends in Real Estate® Asia Pacific 201821

ered many shopping centers to be conceptually dated andslow to adapt to changes now being demanded by evolving
consumer preferences than any challenge from e-tailers.
A final trend that should serve to boost neighborhood shopping centers is the rise of telecommuting, which relieves
increasing numbers of office workers of the need to commute daily to work. As one investor commented: “People
are becoming more local. So the whole concept of the CBD,
where everyone drives in or transits to work is changing. With
IT you don’t need to do that anymore. People still need to workwith other people, but there’s no reason why that shouldn’t be
distributed more. So what they call regional malls in Singapore
are trading now at the same rents as those on Orchard Road.
They’re not secondary assets anymore, they’re equally as
good because people are going there instead.”. . . But Others See Problems for Malls
Other investors, however, were less convinced that Asian retailwill be able to shelter from the storm. According to one HongKong–based consultant, the challenge from e-commerce overthe long term is probably being underestimated, and simple
changes to tenant mixes are unlikely to be enough: “A lot ofretailers are in denial,” he said. “The challenge is partly frome-commerce, but it’s also a question of customers’ expectations. They’re not looking for traditional retailing any longer, theywant something more exciting and interesting and innovative,
using up-to-date experimental technologies.”
Some operators are more open to change on this front thanothers. In China, for example, one experienced mall developer is creating innovative platforms that bring fundamental
changes to mall operating models. These include a potentialchange in the traditional landlord/tenant relationship to one
run on a partnership basis, with risks and returns shared.
Another involves an “offline and online” concept that allows

e-commerce operators to set up physical outlets in strategicmalls, while simultaneously helping mall tenants go online.
Finally, there is the creation of fulfillment centers within shopping centers that consist of reception areas, fitting rooms, andgoods receiving and return areas, together with warehouseand car parking facilities. This model may also have wider
application as a way for underperforming malls to convert
unoccupied space to warehousing facilities to be used forlast-mile delivery purposes. While it necessarily implies a
reduction in rents, it does at least result in a functioning facility.
According to one Singapore-based fund manager active inthe logistics sector: “The in-the-city, in-the-mall pickup places
are going to come to the fore because e-tailers are goingto have to start charging for delivery. Right now, no one ismaking money—the last mile is so expensive they’re finding it
more cost-effective to negotiate with landlords of high-priced
properties that are having challenges on rentals, get themdown, and then use the deep spaces they can’t lease for
distribution purposes. But it depends on the mall, of course;
it’s not happening on Orchard Road.”

Residential Markets Shrug Off Cooling
Measures
Governments across the region have been trying for years toslow the steady rise of residential property prices, usually by
imposing a regime of punitive sales taxes and higher mortgage downpayments. On the whole, however, their efforts
have failed, with prices in most markets continuing to grind
upward. One reason for this is the fear factor: many locals
have concluded that prices will move completely out of reachif they don’t jump in, preventing them ever buying a home.

Exhibit 1-21 Projected Internet Retailing as a Percentage of Total Retail Value, 2021
35%
30%

31%
2011

2016

2021

25%

25%
20%

17%

15%

14%
11%

11%

10%

10%

9%
7%

5%

6%
3%

0%
South
Korea

China

TaiwanAustralia

India

Source: Euromonitor International, April 2017.

22

Emerging Trends in Real Estate® Asia Pacific 2018

Japan

Singapore

New
Zealand

Hong
Kong

3%

2%

2%

1%

Malaysia Indonesia Thailand Vietnam Philippines

Asia
Pacific

Chapter 1: An Embarrassment of Riches

Exhibit 1-22 Major Housing Markets Ranked by
Affordability
Median multiple

Hong Kong

18.1

Sydney12.2

Vancouver

11.8

Auckland

10.0

Melbourne

9.5

Los Angeles

9.3

San Francisco

9.2

London8.5

Toronto7.7

Brisbane

6.2

New York City

5.7

Singapore

4.8

Tokyo

4.7

Source: Demographia, 13th Annual Demographia International Housing Affordability
Survey: 2017.
Note: Median multiple is the median house price divided by the median household income.
Data are for the third quarter of 2016.

The fundamental catalyst for this process, of course, hasbeen almost ten years of low interest rates, although supply shortages and strong demand from foreign homebuyers
have also been factors in some markets. Over the long term,pressure for further price increases seems likely to continue
given that developers are often paying sharply higher prices
for new plots of land. As a result, home footprints are shrinking throughout the region and particularly in markets with thehighest prices. In Hong Kong, for example, some 30 percentof new apartments approved for construction during the first
five months of the year were smaller than 200 square feet,according to government figures.
Australia’s high levels of immigration, in tandem with housing shortages and ever-growing competition from cash-richforeigners, have prompted the country’s three largest states
to impose progressively higher taxes on foreign buyers (nowequivalent to 9.1 percent of purchase prices in Sydney and13.8 percent in Melbourne). Major banks have also introduced
lower loan-to-value ratios on mortgages and are currently
refusing to lend at all to foreign buyers. Development funding
for residential projects has also been restricted.
While Australian residential prices appear to have plateauedin the second half of 2017, the number of foreign purchasers has only increased, suggesting they will serve to cushion
upcoming price declines even if the market is now reaching acyclical peak. According to one interviewee, Chinese buyers

are not deterred by either rising prices or current high taxes:“I think it’s just not an issue for them because, quite apartfrom the fact that many people are just desperate for a foreign
residence, property in big cities like Beijing and Shanghai isalready more expensive than here, and incomes in China arerising faster than both Aussie taxes and housing prices.”
The upward trajectory of house prices is similar in othermarkets, despite even stiffer restrictions and higher taxes.
China imposes numerous potential duties on property sales
depending on location and other criteria, while downpayments there are now a minimum 20 percent and as much as
60 percent for second purchasers in big cities. Average homeprices in China rose 8.3 percent in the year to August 2017,
according to official figures.
Home prices in Hong Kong, meanwhile, rose an annualized
10 percent on record transaction volumes in the third quarterof 2017, according to broker Midland Realty, despite prohibitive
sales taxes on what is already the most expensive property inthe world. Current duties increase buying prices by 30 percent
for overseas purchasers, while downpayments are a minimumof 40 percent for most properties. Arguably the main reason
for high prices is a chronic shortage of new housing stock, butanother factor is that developers are now offering their own
mortgage financing to bridge the gap between what banks
will offer and what buyers can afford. In effect, therefore,
90 percent–plus financing is available in Hong Kong, but only
for mortgages of new properties, thereby generating upward
pressure on home prices because annual demand is muchhigher than the number of newly built homes.
Singapore has been the only market in Asia in which government efforts to contain prices rises have actually beensuccessful. Property taxes introduced in 2010 led to a market
downturn beginning in 2013 that is only now showing signsof reversing, following the easing of some government tariffs
early in 2017. That said, the peak-to-trough adjustment for
mass-market housing has been only about 11 percent—afairly modest decline. Notably, the main difference between
Singapore and elsewhere in Asia is the government’s tighter
control over the land sales process, serving to underscore therole that supply/demand imbalances are playing in residential pricing dynamics. Since this seems an intractable issue
in most jurisdictions, upward pricing pressures are likely topersist for the foreseeable future.

Risk Fatigue
Almost ten years after the global financial crisis, the steady
drumbeat of economic concerns that have informed global
investment decisions—ranging from the consequences ofzero-interest sovereign debt to ever-growing black holes on
government balance sheets—appear finally to have faded.
While the problems themselves remain as deep-rooted as
Emerging Trends in Real Estate® Asia Pacific 201823

Exhibit 1-23 Projected Change in Economic Factors,
Next 3–5 Years
WorsenNo change

Exhibit 1-24 Most Problematic Issues for Real Estate
Investors

ImproveLow yields 6.14

Cost of financeLack of investable properties 6.05

Construction costs

Competition from Asian buyers 5.95
Yield compression

Competition from global buyers 5.26

Competition from Asian buyers

Global economic growth 5.04

Availability of investable properties

Asian economic growth 4.99

Competition from global buyers
Global economic growth

Currency volatility 4.75

Asian economic growth

Impending interest rate hikes 4.68

0%

20%

40%

60%

80%

100%

Cost of finance 4.36

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

ever, investors now seem more inclined to embrace the realitythat local property markets have delivered some of their best
returns ever rather than to question whether economic conditions are really strong enough to justify them. As one fundmanager in Australia put it: “I’m done being worried about
the macro.”That said, a number of background risks are worth noting.
The first, of course, is the continuation of those same macroeconomic issues that investors have now relegated to theback burner. Looking regionally, the Japanese economy
and stock markets may be performing better than they havefor years, but outperformance is predicated on policies thatinvolve buying vast amounts of the government’s own debt,
together with shares of locally traded REITs and exchangetraded funds (ETFs). The overleveraged Chinese economy
is another well-established wall of worry that has now been
compounded by the potential for trade-related disputes withan antiglobalist White House. In truth, however, these issues
remain sideshows for most investors. While there is a significant body of negative opinion ranged against both Japanand China, the concerns are mainly focused on returns andoperational issues rather than economic concerns.
While the potential for a further significant rise in U.S. baserates has obvious negative implications for real estate yields,interviewees remained reasonably positive about interest rate
prospects over the medium term, with a “lower for longer”
scenario deemed most likely. Cost of finance was ranked as
the least worrisome of a range of potential problems in thisyear’s survey.

24

Emerging Trends in Real Estate® Asia Pacific 2018

1
2
Least
problematic

3

4

5
6
Neutral

7

8

9
Most
problematic

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

Geopolitical concerns, however, are now more front-andcenter. In particular, prospects for conflict between the UnitedStates and North Korea have led to concerns of slowing
capital flows to Seoul just as momentum had picked up
among foreign investors. This probably accounts for Seoul’s
low placing in our investment prospects rankings. While mostinterviewees said their own investment plans had not been
affected, one or two indicated that deals had been pulled,
at least temporarily. According to a manager at a large corefund: “We’ve definitely put a couple of deals on the backburner—deals we think we will still do but that we don’t want
to close before we finish raising the fund. We just don’t wantto run the risk that people who are about to go to investmentcommittees for approval have to say: ‘And then they havethese deals in Korea. . . .’”Chapter 2: Real Estate Capital Flows

Real Estate Capital Flows“Flows coming out of China are slowing, but looking forward, portfolio deals
will still get done—it’s theindividual transactions that will havea much tougher time.”

The unprecedented growth in capital outflows from Asianmarkets continued in 2017, with some US$45.2 billion in outbound capital directed into global property assets in the firsthalf of 2017, according to CBRE, almost double the outflow
witnessed during the same period in 2016. The Asia Pacificregion now accounts for some 40 percent of global crossborder flows, according to analysts Real Capital Analytics(RCA), roughly the same as North America.

Exhibit 2-2 Recipients of Chinese Capital Outflows,First Half 2017

4+23+2548C
Pacific US$1.6 billion

Europe,Middle East,
AfricaOutflows in 2017 were directed to big-ticket purchases inWestern markets and have favored European assets (up 225
percent year-on-year to US$21.9 billion, although more thanhalf of this was for a single portfolio purchase), with North
America receiving some US$11.3 billion (up 47 percent)and Asia US$10.4 billion (up 68 percent). Capital moving toAustralia declined 25 percent, however, largely as a result of
the lack of properties available to buy.

Asia

US$10.4 billion

US$21.9 billion

US$11.3 billion

Americas

Source: CBRE.

Exhibit 2-1 Sources of Cross-Border Capital by Zone
60%

North America

12-month percentage

50%
40%Asia Pacific

30%
20%

Europe

10%
0%
2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Source: Real Capital Analytics.

Emerging Trends in Real Estate® Asia Pacific 201825

Exhibit 2-3 Sources of Asia Outbound Real Estate Investment, First Half 2017
China

US$25.6 billion

Singapore

US$6.8 billion

Hong Kong

US$6.6 billion

South Korea

US$2.9 billion

Japan

US$1.3 billion

Source: CBRE.

Particularly noteworthy were increased flows from Singaporeand Hong Kong to the United Kingdom (primarily London),drawn by falling returns on U.S.-based investments as well
as lower relative pricing of U.K. assets in the wake of sterling
devaluation. Other investors noted an increase in Chinese andSouth Korean capital, especially from insurance companies,
shifting focus from U.S. to European assets. Finally, in an effort
to achieve both scale and an element of local expertise, thenumber and value of portfolio deals are increasing, often in theform of partnerships with local developers and operators.
For the time being, the vast majority of Asian capital outflows
are moving out of the region to mature markets, rather than tomarkets within the region. This is a normal strategy for institutions with no prior exposure to global markets, and creates anatural inference that they will rotate back to Asia once they
have created significant portfolios in the West. The question is, however, whether sufficient capacity exists locally toabsorb so much new capital. Although new investment-grade
Exhibit 2-4 Portfolio Deals as a Proportion of All PrivateEquity Real Estate Deals, by Region, 2016–July 2017

Number of deals

Aggregate deal value

60%
50%

48%

40%

38%
31%

30%

28%
22%

20%

16%
12%

12%

stock is being created reasonably quickly, most of it does nottrade. Low transaction volumes outside Japan and Australia
suggest that most markets would struggle to provide a homefor significant volumes of new capital.

Chinese Developers Reined In
While the biggest supplier of Chinese outbound capital is institutional (its sovereign wealth funds deployed around half of thetotal US$25.6 billion in outflows in the first half of 2017, according to CBRE), outflows from Mainland developers have had
the bigger impact on regional markets. This is mainly because
China’s institutional investors are currently focused on markets
in the West, while Chinese developers tend to invest in projects
in Asia. Bidding by Chinese developers—who are often willing to pay more for development plots than local rivals—hascaused land prices to soar in many Asia Pacific cities, and particularly in Hong Kong, Singapore, and Australia. Development
site sales in the region climbed 38 percent year-on-year to
US$239.7 billion in the first half of 2017, according to RCA.
However, “irrational” recent spending by some Chinese investors has now caught the eye of authorities in China, resulting
in the progressive tightening of capital controls beginning inthe second half of 2016, and more recently in August 2017.
Although the extent of the impact of the August crackdown
remains unclear, the consensus is that overall outflows may
not see a meaningful decline given firstly that sovereign andstate investors will probably be unaffected and secondly that
there is already a substantial body of Chinese-owned capital
held outside China (much of it in Hong Kong) that is not subject to the rules. Instead, scrutiny will most likely fall on private
players, including insurers, conglomerates, and other privately
backed enterprises and individuals. Activity by at least somestate-owned enterprises will also probably be affected.

10%0%North America

EuropeAsia

Source: Preqin.

26

Emerging Trends in Real Estate® Asia Pacific 2018

Rest of world

The impact of the most recent regulatory curbs on Chinese
developer outflows into Asia, therefore, is proving to be significant, especially coming as it does on top of a preexistingChapter 2: Real Estate Capital Flows

59 percent year-on-year reduction in capital outflows to otherregional markets during the first half of 2017. According to
one investor active in Australia: “What we are noticing is how
sharp the corrections have been. In the past, we’ve seen
significant investment activity in Sydney and Melbourne by
Chinese developers, and the competitive tension of Chinese
capital breathing down their necks has forced other investors
to sharpen their pencils. But now they have retreated. Thattension is simply not going to be there, so we think it’s going toresult in a softening of cap rates and deflate some of the heatin places like Sydney.”
Many investors are now tracking how this plays out given that
Chinese projects in Australia “are getting a bit squishy aroundthe edges,” as one fund manager put it. “Most local developers stepped out of the residential market two years ago when
they saw this happening, so they have very little product on
the market that they’re selling. The only thing that’s being
closed and sold now is from the Chinese developers, andwe’re starting to see them having a few concerns.”
The same phenomenon has also been noted in the UnitedStates and other international markets, with Chinese investors
having difficulty closing deals as they wait for the bureaucratic wheels to turn in granting approvals. However, whether
any of these opportunities actually appear on the market, or
are instead intermediated by cutting unit prices of new-build
apartments or via help from affiliated companies (as is normal
in China) remains to be seen.
One further way in which Chinese capital controls may affectinvestment outflows is by redirecting them to markets thatenjoy preferential status with Beijing in policy terms. Several
interviewees suggested that this may therefore result inincreased flows from China to Hong Kong, either for the purposes of investment in that city or for re-export elsewhere in
the world. Perhaps unsurprisingly, Hong Kong was the largest
net recipient of incoming capital (mostly from China) in thefirst half of 2017, up 87 percent year-on-year to US$8.6 billion,
according to RCA. That said, activity by Chinese developers
in Hong Kong has dropped away significantly in the second
half of the year. In addition, investments in countries involvedin China’s “One Belt One Road” infrastructure policy initiative
may also be treated more favorably by regulators.

Japanese Outflows Inch Up
Another huge source of Asian capital yet to appear in global
markets in any size is Japan. Led by the US$$1.3 trillion
Government Pension Investment Fund (GPIF), Japan’s major
public pension funds decided several years ago to create a 5
percent allocation to real estate assets, and have hired several
real estate managers to oversee implementation. But while low
domestic yields and a shortage of suitable assets mean thatJapanese public and corporate pensions have little choice

but to venture outward eventually, they have so far been slow
to test the waters.
According to one fund manager involved in talks with the
GPIF: “They’re talking and making us dance a merry dance,completing what must be the world’s longest-ever RFP[request for proposals]. But I think there is probably a certain
amount of nervousness in Japan—and probably rightly so—that they risk making the same mistakes they made last timeround, so they are going about it in a much more structured,professional way, and not just turning up in New York and buying the Rockefeller Center.”Other interviewees also commented on the deliberate
approach of the Japanese pension funds. While moving painfully slowly, managers are studiously avoiding the strategy oflarge one-off deals via direct investments adopted by manyother large institutional investors in Asia as they move into
foreign markets. “They are investing in a way I always thought
investors should invest,” commented one fund manager. “Bywhich I mean starting with open-ended funds then moving toseparate accounts or maybe closed-end funds, then to oneoff deals. I still can’t get my head around the way other Asian
institutions are doing this, where the last thing you should dois the first thing that you do.”A few public and corporate pension funds, however, have now
begun investing into open-ended funds in mature markets,with the lion’s share of outflows heading to the United States.
According to RCA data, Japanese investments in U.S. properties amounted to US$1.3 billion in the first half of 2017, up
some 79 percent year-on-year.

Asian Outflows Will Only Increase
Quite apart from the impending arrival of a glut of Japanese
capital, the long-term trend of increased outflows into individual Asian markets is almost certainly set to continue given thefundamental fact that more capital is being generated in local
economies than they can absorb domestically. Other factors
add to this affect, including the need to diversify risk, the needto adjust allocations to different asset classes in accordancewith international norms, and the diminishing returns now
available for investments in many domestic assets or projects.
In particular, and notwithstanding the recent regulatory
crackdown, interviewees agreed there is little prospect of any
significant slowing in outgoing flows from China over the longterm, especially since authorities are now able to witness theextent to which property yields have been squeezed as aresult of the most recent round of restrictions.
According to one Hong Kong–based fund manager: “I don’t
think you’re going to see China stopping money coming out. In
practice, capital movements are probably mostly dependent
Emerging Trends in Real Estate® Asia Pacific 201827

Exhibit 2-5 Time Horizon for Investing

1–3 years

Exhibit 2-6 Change in Capital Flows into Asian Markets,
by Region

2018
2017
2016

Over next 5 years

2015

6.68

Asia Pacific

6.53
5.88
5.56

Europe

3–5 years

5.85

Americas12
Large
decline

5.66
5.37

3

4

5
6
Stay
the same

7

8

9
Large
increase

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

10-plus years

10%

20%

30%

40%

50%

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

on where the renminbi is and whether it stays stable. And we’ve
just had a period of relative [currency] stability, so outward
movement is slightly easier than it was when foreign reserves
got down to Rmb3 trillion or so. It’s just that Beijing doesn’t
speak with one voice, so certain people can’t get money out
at certain times. I look at it from the perspective of the experience we’ve had in Hong Kong—you’re going to continue to see
insurance companies coming in either openly or not so openly
and being part of the big deals here.”
The rapid increase in the amount of institutional capital now
active in the region, both from within Asia and from global
sources, continues to have an impact on the length of timeassets are being held. This is not simply a question of thepreference among institutional investors for longer investment
timelines. The overarching theme emerging this year of investors prioritizing yield over rental or capital growth reflects apreference for holding high-quality assets providing conservative but safe returns over the long term. Survey results confirm
this dynamic, with a pronounced shift in favor of both five-toten-year investments and more-than-ten-year investments.

Incoming Flows Beginning to Rise
U.S. and European institutional funds have for years opted
not to boost allocations to Asia to correspond with regional
economic growth. Today, however, sentiment appears to
be improving, driven both by the need to tap Asia’s higher
economic growth in order to improve long-term returns, andto diversify away from markets in the West that are by now
fully valued and where most of the low-hanging fruit from theglobal financial crisis has already been absorbed.
28

5.40

Middle East/Africa

5–10 years

0%

Until end-2018

Emerging Trends in Real Estate® Asia Pacific 2018

Flows into Asia from the United States continue to outweighthose from Europe. Historically, they have tended to be
directed to the value-add or opportunistic space, principallyfor the purposes of return enhancement. Strategies aregradually evolving, though. According to a manager at one
fund currently raising capital in the United States: “Where I’mseeing things change now is that we’re probably seeing an
increase in U.S. capital in the value-add fund we’re raisingright now compared to what we raised in the previous one.
We’re also seeing more U.S. capital going into Asia corevehicles. So, what we’re seeing now is that in addition to theenhanced return, diversification is also playing a part. I think
there’s also partly an acknowledgment that property values
have become toppy in a lot of markets in the U.S., so diversification is more important now, too.”
European investors, meanwhile, have until recently remainedlargely focused on European assets, but are “now starting to
see Asia through a different lens,” according to a manager at
a European-based institution, who noted increasing interest
from northern European players looking for core and coreplus investments.
According to one Hong Kong–based fund manager: “I’m definitely sensing an increased appetite for European investment
in Asia compared to four years ago, when we raised our first
Asian funds and just 7 percent of capital was from Europe. At
the time, they were very risk-averse after the global financial
crisis, and I think they’ve taken a long time to rebalance andmove back up the risk curve.”
Investors from Middle Eastern institutional sources have beenprominent in the market for the last several years, but activity appears to have slowed recently, although they remain
generally active in canvassing deals. As one fund manager

Chapter 2: Real Estate Capital Flows

Exhibit 2-7 Regions Targeted by Private Real Estate Investors in the Next 12 Months,
2Q 2016 versus 2Q 2017
2Q 2016

Proportion of fund searches

60%

56%

2Q 2017

54%

50%
40%

40%

41%

40%

30%

27%
21%

20%

11%

10%
0%

38%

5%

North America

EuropeAsia Pacific5%Rest of world

7%

Emerging markets

GlobalRegion targeted
Source: Preqin.

commented: “I think it’s true that the troubles they’ve had andthe decline in oil prices have had an impact, but at the sametime we are seeing more and more Middle Eastern institutions, both sovereign wealth and pension funds, that haven’t
invested in the Asia Pacific before are now starting. Being
new and inexperienced, they’re coming into funds.”

Fundraising
In general, raising capital remains as difficult as ever for mostregional funds, although the same dynamic from previous
years in favor of large, established funds or smaller, specialist
players continues. As one fund manager raising capital for afund focused on themes of demographic change said: “Wewere heartened by the fact that there was appetite from U.S.

investors for a core-plus strategy, and I think a lot of it wasthat it wasn’t a me-too strategy that a lot of the core funds areusing—so education, an aging demographic, e-commerce[i.e., logistics] were the key themes which gave us a strong
response.”
Unlike in other global markets, funds in Asia do not haveparticular problems with excess “dry powder.” But with somuch competition to buy assets, there is still a backlog whenit comes to funds getting capital into the market, especially for
those looking to deploy it in large amounts. As a result, institutions are increasingly looking at club or direct deals insteadof waiting in line with open-ended funds. As a manager at
one European institutional fund said: “The issue is the gap
between committed and deployed capital—sometimes,

Exhibit 2-8 Closed-End Private Real Estate Dry Powder, by Fund Primary Geographic Focus, 2007–2017
$150
$120

US$ billion

North America$90$60EuropeAsia

Rest of world$30$0
Dec 2007

Dec 2008

Dec 2009

Dec 2010

Dec 2011

Dec 2012

Dec 2013

Dec 2014

Dec 2015

Dec 2016

Sep 2017

Source: Preqin.

Emerging Trends in Real Estate® Asia Pacific 201829

committed capital is pretty large and deployed capital has
been slow out the door. We faced that issue, too, so we now
try to get into deals with a manager where we know at least
the assets are ring-fenced. Otherwise, you end up with situations where you’ve missed the cycle in the Asia Pacific andyour capital stays uninvested.”
While the number and size of open-ended core funds in Asia
remain tiny by Western standards, demand is steadily increasing as more investors begin to opt for steady yields rather than
big returns. However, local money continues to be hesitant
about placing capital with regional funds. Although there
has been an incremental increase in contributors from within
the region, in particular in the opportunistic space, the vast
majority of assets under management—particularly for corefunds—still comes from non-Asian investors.
While one interviewee described this preference among local
institutions for direct deals in the core space as “sovereign
wealth fund mentality,” another suggested it stemmed inpart from the flawed way that regional core funds are often
structured (i.e., as Pan-Asian open-end funds). While openend structures offer benefits to investors via generally lower
fees and transaction costs (as a result of fewer property
sales), they are not necessarily the best approach: “To invest
in a U.S. dollar–denominated fund that co-mingles markets
as diverse as Japan, China, and Australia, and have to roll all
the different lease structures, currencies, taxes, ownership
structures, and the economic and property-market cycles
into one product is fundamentally not what core investors arelooking for. Those markets are all being lumped together at
the moment because of a drive by managers to create longevity of fee revenues rather than because the investment thesis
makes sense.”
Whatever the cause, local capital continues as a rule to avoid
investing through such core funds. Although one fund manager indicated his fund had for the first time received money
raised from Mainland Chinese wealth managers and insurance companies, he estimated that no more than 5 percentof core fund capital in the region was currently sourced fromwithin Asia, compared with rates of some 80 percent to 90
percent domestic participation for equivalent funds in the
United States.
This may change when Asian institutional capital—particularly
Japanese pension and Chinese insurance companies—
have filled their boots in the West and decide to direct more
attention to regional markets, an eventuality that would be welcomed by core fund managers given that return expectations
among locals tend to be more realistic than those of investors
from Western markets. Until that happens, however, “corefunds in Asia will remain subscale and therefore challenged.”

Banks Tighten in Some Markets
As a general rule, regional banks remain the obvious sourceof finance for real estate deals. Levels of liquidity regionallyremain very high and in most markets big investors foundbanks more than ready to provide capital to finance deals forprime assets, as they have for many years.
At the same time, however, some interviewees spoke of how
certain types of deals in certain markets were becoming
harder to finance, creating a degree of concern going forwardthat banks are preparing to tighten standards and increase
the cost of capital. According to one Singapore-based
opportunistic fund manager: “We are seeing some significant
tightening by lenders in selected markets—notably Australia
and China—and we think there’s some inevitable fallout fromthat which creates some interesting investment pipelines.”●●●●

In Australia, “banks continue to provide extensive credit
to strong players, but their stance regarding smaller or
weaker players is leading to a tightening. They are also
becoming more selective.” Loan-to-value (LTV) ratios inAustralia have recently pulled back from 60 to 65 percent
to 55 to 60 percent. Changes apply in particular to theresidential sector, where lending to developers has been
reduced. Grade-B property purchases also are receiving
more scrutiny.
In China, where the government’s control of bank lending policies allows it to cut or increase developer accessto finance as a means of managing housing supply andpricing, the government is addressing the latest upward
leg of home prices by (among other things) drasticallyreducing bank loans for construction and land-purchasepurposes. Coming on top of shrinking margins and lower
home sales as a result of a simultaneous government
squeeze on mortgage availability, this move has placedsmaller developers in peril. As usual, the response within
the industry has been to seek out alternative sourcesof capital. A number of resourceful alternative financing

Exhibit 2-9 Change in Availability of Debt andEquity Finance
Equity for financing
or new investment 5.74
Debt for refinancing 5.66
or new investment
Debt for development 5.15
1
2
Large
decline

3

4

5
6
Stay
the same

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

30

Emerging Trends in Real Estate® Asia Pacific 2018

7

8

9
Large
increaseChapter 2: Real Estate Capital Flows

Exhibit 2-10 Change in Availability of Different Typesof Debt
Gateway cities 6.41
Refinancing 6.14
Small loans 5.95
Large loans 5.76
Development finance 5.57
Regional cities 5.49
1
2
Large
decline

3

4

5
6
Stay
the same

7

8

9
Large
increase

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

channels have evolved over the years, including the trust
sector, the peer-to-peer lending industry, domestic bonds,
and asset-management plans.
●●

In Japan, the cost of bank debt remains the lowest in
Asia, with even foreign investors able to borrow at under
1 percent. Even so, availability has recently tightened. In
June 2017, the Bank of Japan’s Diffusion Index, whichmeasures banks’ willingness to lend, recorded the largest
single decline since the global financial crisis, as majorbanks became more selective about who would receive
funding in tightly priced transactions. This is a significant
development even though the cost of debt seems largely
unaffected and a recent decline in transaction volumes

Exhibit 2-11 Policy Interest Rates in Asia ex-Japanmeans that banks (which still have vast amounts of cash
to deploy) cannot be so choosy about borrowers.
Investors in other markets tended to echo the theme of aslowly evolving background of tighter lending policies, without
any profoundly negative shifts. In Hong Kong, for example,
one fund manager noted that bank lending decisions are“more likely to be based on how much of their annual target
they have put out and your own relationship with the bank.
The [authorities] continue to monitor local banks very carefully—they can’t lend more than 40 percent loan-to-value andthere are increasing restrictions on how much they can lendon the construction piece as well. So, policy is tighter, but I
wouldn’t say it is drastically tighter.”

New Financing Options Evolving
With tighter bank lending regimes now in the air and evershrinking returns to be made from investments in conventional
real estate, a number of debt funds have now been established across the region, in particular in Southeast Asia,
many of them involving local capital. As one fund manager
who was considering entering this area explained: “I think
there’s opportunity to position your investment at a secondloss position—in other words, either preferred equity or mezz
[mezzanine], because there’s a funding gap evolving wheresenior lenders are providing a lower level of leverage. So, we
can come in at 50 to 70 percent LTV and still get very attractive risk-adjusted returns with some equity buffer above.” At
the same time, however, “where banks are retreating it canoften be for good reason, so you need to be very cautious
and filter who you’re going to lend to. Mostly, those that requiremoney are the ones you don’t want, so there need to bestrong filters. But it’s going to be a good harvesting opportunity over the next two or three years.”MarketInterest rate*

Number of ratecuts in 2Q 2017

Change in 2Q 2017

Australia

1.5%

0

0 bps

China

4.35%

0

0 bps

Hong Kong

0.78%

0

–16 bps

India

6.25%

0

0 bps

Indonesia

4.75%

0

0 bps

New Zealand

1.75%

0

0 bps

Nonbank institutions (insurers
or pension funds) 6.22

Singapore

1.00%

0

+5 bpsMezzanine lenders 6.16

South Korea

1.25%

0

0 bps

Taiwan1.375%

00 bps

Alternative lending platforms 6.08
(e.g., peer-to-peer/crowdfunding)Thailand

1.5%

0

0 bps

Sources: CBRE Research, various central banks and monetary authorities, second quarter
2017.
*Rate at end of July 2017.
Notes: bps = basis points. Policy interest rate: Australia = cash rate; China = one-year
lending rate; Hong Kong = three-month HIBOR; India = repo rate; Indonesia = seven-day
repo rate; New Zealand = official cash rate; Singapore = three-month SIBOR; South Korea= base rate; Taiwan = discount rate; Thailand = one-day repo rate.

Anecdotally, however, most of these new providers of debt aresmall-scale and have so far met with limited success, partly
because structuring debt deals in Asia is far from straightExhibit 2-12 Availability of Debt by Type of Lender

Sovereign wealth funds 5.94
Banks 5.60
1
2
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 201831

forward and partly because of competition from banks, which
are for the most part still quite willing to provide liquidity.
As one Hong Kong–based fund manager observed: “Wesee them [i.e., debt funds], but we haven’t really seen them
deploying capital—it’s quite difficult for them to make theirpricing attractive in Hong Kong.”
That said, certain markets provide more opportunity than others. In particular, Australia has seen some significant recent
developments in this area. In the nonbank debt space, various
investment banks, sovereign wealth funds, and large private
equity players have entered the market with a view to filling a
gap in the market to provide debt where local banks will not,most obviously as a way to top up LTV ratios for residential
developers and also nonprime office developments. In one
recent case, an American investment bank provided funding toa project in Melbourne involving Mainland Chinese investors.
In addition, others are positioning to compete directly withthe big four incumbent banks, whose effective stranglehold over the market has led to a fairly restrictive financing
environment, including in particular short tenor on loans.
A number of Japanese and Chinese banks have now
appeared in Australia, the former to escape cripplingly
low returns in their home market, and the latter to provide
financing options to Chinese investors. In addition, Australiansuperannuation and various foreign investors are looking
for opportunities. According to a manager at large global
insurer: “We’re evaluating a direct lending business inAustralia where we could lend senior at 50 percent to 60 percent LTV and long tenor, which is not really available on themarket. We have the ability to lend at ten to 20 years, which
other people can’t do.” Foreign players without access tobalance sheets featuring a local-currency income stream arehampered, however, by the need to hedge their exposure—a significant extra expense given the generally high cost ofhedging for the Australian dollar.
Japan is also a market drawing foreign interest in this area,
and again the focus is on tenor, either in the form of longerterm debt or short-term bridging loans. Mezzanine debt isalso available in China, with returns reputed to be in the areaof 25 to 30 percent. For foreign investors, however, mezzanine
deals in China may be playing with fire because local regulations raise issues of priority in the event of bankruptcy that
may relegate them to the bottom tier of creditors, depending
on how the deal is structured.
The one market where mezzanine continues to be a major
factor in structuring investments is India, where the going rate
stands at around 16 to 18 percent, according to one locally
based interviewee, compared with standard construction
lending of 12 to 13 percent from local banks. Low tax leakage makes it a popular option among foreign investors, withdemand for funding currently coming in particular from local
residential developers trying to meet newly imposed regulations requiring timely completion of residential projects.

Bonds
As a financing channel, local bond market issuance still represents a small fraction of development funding provided byregional banks. Nonetheless, the bond markets are growing
rapidly. Total sales of Asia ex-Japan foreign currency corporate bonds reached US$221 billion in the first nine months of
2017, already higher than full-year issuance in any previous
year. Of this, about half came from real estate developers, andmost of that hailed from China, with the majority of offshore

Exhibit 2-13 Asia ex-Japan Corporate Bond Sales, 2011–2017$250

US$ billion

$200
$150
$100
$50
$0

2011

2012

Source: Bloomberg.
*Through September.

32

Emerging Trends in Real Estate® Asia Pacific 2018

2013

2014

2015

2016

2017*

Chapter 2: Real Estate Capital Flows

Exhibit 2-14 Asia ex-Japan U.S. Dollar Corporate Bond Issues

Percentage of total bonds issued

60%

60.0%

50%
40%
30%
20%
12.7%
8.8%

10%

5.8%

4.7%

3.1%

Indonesia

India

Singapore

0%
China

Hong Kong

South Korea

Source: Bloomberg.
Note: Data are for 2017 through September.

bonds issued in Hong Kong. The total amount of foreign currency bonds outstanding across the region is expected to top
US$1 trillion (up from a current US$730 billion) within three
years, according to projections by Australia’s ANZ Bank.
Quite apart from the rapid rise in the number of local bondissues, local investor appetite for Asian bonds has also
increased rapidly in recent years, to the point that demand
from regional—and especially Chinese—buyers is today
easily enough to absorb the vast majority (some 79 percent in2017) of new issues in the region. This newfound demand for
Asian corporate debt means that bond markets have becomeless volatile due to local investors’ differing perceptions ofrisk—be it economic, regulatory, or geopolitical. This hasbrought a certain amount of stability to bond markets that in
the past were often notoriously volatile.
As a result, yields for foreign-currency Chinese developerbonds have remained low even after the imposition of
government measures aimed at cooling demand in China’s
residential sector took effect in 2016. “International investors were concerned about how this would affect developer
earnings and began to ease off buying their bonds,” said one
interviewee. “But it didn’t have any impact because local buyers stepped up anyway. And now the international demandhas come back, which has forced yields down more.”
Regulators limited the number of new offshore issues by
Chinese developers in the second quarter of 2017, before
relaxing restrictions in the second half of the year. Since then,developer issues have spiked. As an example, a US$200
million issue in August 2017 by a prominent Chinese developer, rated at BB– by rating agency Moody’s, was ten times
oversubscribed, pricing at 5.12 percent before tightening to4.03 percent in October. While that seems low for a supposedly high-yield bond, even priced at these levels bonds are
generating higher returns than equivalent issues in Westernmarkets. One reason that both foreign and local asset managers are prepared to buy at such tight yields is the general
expectation that large developers will enjoy implicit support
from the Chinese government in the event of a default.
China’s local currency bond market, meanwhile, surged after
government restrictions were relaxed from the beginning of
2015, allowing smaller developers who could not accessoffshore bond markets the ability for the first time to issue
their own debt. Favorable pricing quickly made this the go-tosource of funding for developers (replacing loans from trust
companies), but as China’s home prices soared and doubtsrose as to whether bond yields accurately reflected market
risk (looser scrutiny means that about two-thirds of all corporate debt in China holds the highest AAA rating), authorities in
October 2016 once again imposed restrictions on local bondissuance. These were relaxed in July 2017 in order to head
off a funding crisis for developers, but issuance is thought
unlikely to return to previous highs any time soon.

REITs
With base rates seemingly set for a long period of incremental
increases, REITs in the Asia Pacific region (apart from Japan)
have continued to show surprising resilience. At the sametime, signs are emerging that REITs’ appeal may be weakening, as global equity markets continue to rally on better growthprospects and the likelihood of higher interest rates dims
the attraction of an asset class that tends to trade in line with
fixed-income assets.

Emerging Trends in Real Estate® Asia Pacific 201833

Exhibit 2-15 Market Capitalization of Listed REITs in Asia Pacific
$300

$250

62

Singapore
44
Japan

$200

49

US$ billion

Australia

$150

$100
2
17

$50

1
7
2

$0

21

4
23

35

2001

2002

2003

41

46
15

17

41

46

2004

2005

27
20
8

97
64

104

27

5
24

70

40

95

46

29

88

88

77

81

82

2013

2014

2015

72

38

29
64

51

99.8

75

68

2010

2011

88

98

105

38

2006

2007

2008

2009

2012

2016

2017*

Sources: Real Capital Analytics, Bloomberg, Deutsche Asset Management.
Note: Figures exclude land acquisitions and developments, hospitality, and apartments/residential.
*As of October 2017.

There has also been rising speculation that smaller REITs
in Asia Pacific markets may be subject to takeovers. Thisis mainly because they offer the scale that deep-pocketed
investors are seeking at a time when assets have become
increasingly hard to source. In addition, many regional REITs
are overleveraged (not ideal with interest rates rising), or trade
at a discount to net asset value (NAV), which in turn boosts
their appeal as a break-up play. In Singapore, there is addedpressure to consolidate given the high numbers of properties
already owned by domestic REITs, which therefore provide
limited possibilities for organic expansion at home. In addition,
many Singaporean REITs, especially those in the logistics
sector, are in the midst of a cyclical downturn. Already, there
have been several REIT takeovers in the region in 2017, witha number of others probably in the pipeline as potential
buyers circle.
Still, takeovers are not straightforward. REITs in some markets—in particular Japan and Australia—often have externalsponsors with large shareholdings who may be difficult tooust. Others (particularly in Japan) have adopted “poisonpill” strategies aimed at deterring takeover bids. In addition,according to one local REIT manager: “You need to have capital at short notice, so deep pockets are needed for the buyers
because the capital markets may not give them the money.
And then, as far as the corporates on the real estate side go,they can be trading at huge discounts to NAV. Although inprinciple this makes them targets, unless someone is willingto pay a recognizable premium to the current valuation, it’s

34

Emerging Trends in Real Estate® Asia Pacific 2018difficult to accumulate sufficient stock to execute a successful
takeover. So you’ll rarely see someone making a move on alarger company, even if liquidity is rather high. More often thannot, the company would buy back shares if the price is toolow.” Nonetheless, the path of least resistance appears to bein favor of more takeovers to come.
Japan
The boom in the J-REIT market sparked by the government’s
quantitative easing and REIT-buying program appears tohave faded in 2017. The local TSE REIT index was down some
8 percent year-on-year as of the end of October, even as
equities markets have advanced. At the same time, J-REITs
are trading at a premium to NAV of around 9 percent, higher
than other markets but well under their high of 58 percent at
the beginning of 2015. This decline is partly due to institutional selling in anticipation of rising interest rates, and partly
to selling by domestic mutual funds—holders of about 20
percent of the entire J-REIT market by value—in the wakeof an investigation by local financial regulators into their risk
management practices.
As a result, there has been a change in the dynamics of REIT
buying, with funds now opting to invest via exchange-tradedfunds. While this appears to satisfy regulators, it has created a
distortion in the way that funds are channeled into the market,
meaning that more capital is now being directed to smaller,
lower-rated REITs. Share prices at these vehicles have risen,
therefore, even as those at bigger REITs have fallen.

Chapter 2: Real Estate Capital Flows

While the government’s continuing support to the sector
should help prop up prices, J-REIT yields remain compressedat an average 4.2 percent as of the end of October 2017. This
represents a healthy 420-basis-point spread over the price ofthe sovereign bond, but J-REITs remain pricey by the standards of other regional markets. At the same time, rising pricesof new assets mean they are finding it harder to purchase atlevels that provide an accretive yield. Although J-REIT acquisitions still represent approximately 60 percent of transactions inTokyo (and are one of the main reasons that foreign investors
find it so difficult to buy core assets there), purchasing activity
has declined in 2017, according to interviewees, while government rules requiring increased transparency have reduced thenumber of new listing candidates.
Australia
With interest and bond rates set to rise and Australian banks
beginning to tighten lending requirements, share prices
at A-REITs have faltered from first-half highs in 2017, with
Australia’s ASX 200 A-REIT index standing at a loss of around
4 percent at the end of October, compared with a flat performance in the broader equity market. Yields, meanwhile, werearound 6 percent. Retailing REITs have been the worst performers due to negative sentiment stirred up by the imminent
arrival of U.S. e-tailer Amazon in the Australian market. For thesame reason, logistics REITs have outperformed.
While A-REIT shares have been supported to some extent by
the prospect of ongoing rental increases across the board forcommercial properties, rising gearing is a looming problem,with a growing number now approaching or exceeding the
40 percent leverage threshold.
That said, recent asset sales by A-REITs have been strong,often fetching well over book value and suggesting that
A-REIT valuations may be conservative. In addition, A-REITs
are currently trading above their historical spread to the local
sovereign bond, suggesting that rising interest and bondrates can to some extent be absorbed within that spread
without pushing cap rates out. Finally, a number of A-REITs
have successfully raised equity in 2017 for the funding of newacquisitions. This bodes well, and with real estate continuing
to be attractive as a defensive asset class, capital raising is
expected to continue going forward.

S-REITs are absorbed by bigger players or cashed-up corporate rivals. And with significant new supply in the pipeline
across several asset classes (especially retail), headwinds for
REITs are likely to continue, notwithstanding a recent firmingof rents in the office sector.
Meanwhile, many S-REITs continue to look abroad to source
new assets. Australia remains a favorite stomping ground,although a lack of stock and the high pricing of available
assets have seen transactions from foreign investors dip in
2017. South Korea was noted for its “buoyant logistics market
that hasn’t yet been tapped for securitization.”
China, meanwhile, still has its followers, but concern about
operational difficulties is growing. As one Singapore-based
REIT manager observed: “It’s everything from the volatility to
the regulatory risk. They change a few things along the way
and boom, your whole model goes out the window. The guys
in private equity take a shorter-term view, and they can get in
and out, or get around certain issues along the way. But ours
is a longer-term play, and too often you find you’re subject
to the potential of additional taxes or some other issue that’s
tweaked to align with their own objectives.”
New REIT Markets
Various REIT frameworks that have been in the works for years
in several Asian jurisdictions have inched closer to realizationin 2017, but the sticking point as usual remains the crucial
issue of tax exemptions. The Philippines is one such market.
Investors had hoped that the most recent administration would
move to implement the required reforms, but government
officials appear to be unconvinced that tax breaks would be
sufficiently beneficial to the domestic economy.
China is another market where the tax-exemption issue has
yet to be resolved. There do appear to be signs of progress,
however, with rumors circulating that authorities are on thebrink of releasing new regulations for a rental property–based
REIT that will be sold to retail investors on domestic publicmarkets by the end of 2017. Others remain skeptical, however, pointing to the problem of super-compressed yields
on Chinese real estate as runaway capital values far outstrip
rental increases.

Total returns from Singapore’s SGX S-REIT index amounted
to 21.4 percent in the first nine months of 2017 (with yields
averaging 6.4 percent), a handsome return for a market where
domestic real estate has been in a multiyear slump.

India, therefore, remains the real bright spot. Despite enduring cynicism that India’s suffocating bureaucracy would
effectively snuff out the chances of any early introduction of
the country’s first REITs, there now seems a real prospect thatIndia’s maiden REIT will be listed by the end of the first quarterof 2018.

Still, with the market in Singapore saturated, speculation
persists of further consolidation in the REIT sector as weaker

The remaining problem for REITs in India, therefore, appears
no longer to be a regulatory logjam, but rather the question

Singapore

Emerging Trends in Real Estate® Asia Pacific 201835

of how to price real estate assets at a level that will appeal toboth sponsors and REIT shareholders. As one fund manager
observed: “REITs in Japan and Australia and Singapore are
trading at yields that are about 370 to 450 basis points above
their ten-year government bonds. And India’s ten-year government bond now is at about 6.6 to 6.7 percent, so arguably the
trading yield of the REIT should be at least 300 to 400 basis
points above that. But from the perspective of the developeror the issuer or the sponsor, the question is: ‘Why do I have togo through a REIT to get that kind of return when I can sell theassets into the market and get better prices?’ There are prospects for growth, of course, but the question then becomes
where do you draw the line?”
On the other hand, demand in India for a legitimate institutionalized investment opportunity at the retail level is very
high, and may persuade investors to pay up for REIT sharesat higher levels. According to one locally based consultant:“Indian stock markets today are currently at an all-time high,with every single new recent IPO subscribed many times
over. So, I think from a financial market perspective, Indian
markets would be willing to pay a decent price. Then the
Indian domestic story is also very strong—lots of money
coming from the Indian middle class is finding its way to thestock market. So, with real estate direct investments currently
looking very stark on the residential side, and in the absenceof quality investment alternatives, I think it’s very likely thatpeople would consider investing into the office space throughthe REIT route as a viable option, even if it’s expensive byindustry norms.”

36

Emerging Trends in Real Estate® Asia Pacific 2018

Chapter 3: Markets and Sectors to Watch

Markets and Sectors to Watch“From an occupational market point of view—which is where for core investors thelong-term value lies—the question iswhere can we drive demand andwhere we can get the rental growth—and today that’s just very difficult.”

The survey results for this year’s Emerging Trends in Real
Estate® Asia Pacific report reflect a combination of cross currents—some of them strikingly different—created by different
types of investors as they pursue a range of different strategies.

ing stable long-term yields that may appear vanishingly low toinvestors pursuing more conventional investment strategies.

Most obviously, there is a growing divergence between investors embracing either growth- or yield-driven approaches: onthe one hand are those looking to maximize returns in an environment where ever-growing competition has squeezed yields
to historical lows. On the other hand are those—usually larger
players fleeing near-zero returns in sovereign bonds—seek-

Others still, meanwhile, are focused on tapping returns associated with long-term economic growth in developing markets
like India and Vietnam. As one fund manager said: “We go inwith a long-term perspective about being there for the nextten to 20 years and being part of this stellar demographic
cycle. There is retail consumption, there is office demand,
IT demand, domestic demand that hasn’t come out yet. So
you talk about capital appreciation, finding the high yield andExhibit 3-1 City Investment Prospects, 2018

Exhibit 3-2 City Development Prospects, 2018

generally poor fair generally good
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22

SydneyMelbourne
Singapore
Shanghai
Ho Chi Minh City
Shenzhen
Tokyo
Guangzhou
AucklandOsaka
Beijing
MumbaiHong Kong
JakartaBangalore
Bangkok
China – second-tier cities
ManilaSeoul
New Delhi
Kuala Lumpur
Taipei

5.97
5.96
5.67
5.66
5.66
5.41
5.33
5.28
5.23
5.12
5.10
5.04
5.04
5.01
4.96
4.90
4.83
4.79
4.78
4.75
4.52
4.45

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

generally poor fair generally good
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22

SydneyHo Chi Minh City
Melbourne
Shanghai
Shenzhen
Singapore
Auckland
MumbaiBangalore
Guangzhou
China – second-tier cities
JakartaTokyo
Hong Kong
Osaka
BangkokBeijing
New Delhi
ManilaTaipei
Kuala Lumpur
Seoul

5.81
5.76
5.68
5.48
5.47
5.42
5.33
5.20
5.19
5.19
5.18
5.17
5.16
5.01
4.99
4.99
4.94
4.92
4.89
4.83
4.77
4.75

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

Emerging Trends in Real Estate® Asia Pacific 201837

hoping for compression. And you also
talk about being there for the long term,
to be able to get 4 to 5 percent rental
growth per year.”
The fact that markets in Australia are able
to satisfy two of these requirements at thesame time—its gateway cities combine theappeal of a stable investment environment
with a combination of relatively good current yields and the prospect of strong rental
growth going forward—tick the right boxes
for many investors in Asia and explain thestrong performances by both Sydney andMelbourne in this year’s rankings.
Other top trends from the Emerging
Trends survey include:●●

destination for yield investors due tothe healthy spread between current
cap rates and the country’s superlow sovereign bond prices.
●●Leading buy/hold/sell ratings for thevarious asset classes are as follows:●●●●

A stronger showing by Tokyo.
Declining prospects for rental
growth accounted for last year’s fallin the rankings for what had previously been a top performer. While
concerns over rental growth continue, Japan is today a sought-after

The resurgence of Singapore,mainly as a result of investors betting
the markets have bottomed after
several years of weakness.

●●●●

Office—buy Ho Chi Minh City,
sell Taipei.
Residential—buy Ho Chi Minh City,
sell Seoul.
Retail—buy Ho Chi Minh City,
sell Taipei.
Industrial/distribution—buy
Shenzhen, sell Taipei.

Exhibit 3-3 Historical Investment Prospect Rankings
2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007
SydneyMelbourne
Singapore
Shanghai
Ho Chi MinhCity
Shenzhen
Tokyo

1
2
3
4

9
16
21
6

5
6
7

Guangzhou
AucklandOsaka
Beijing
MumbaiHong Kong
JakartaBangalore
Bangkok
China – secondtier cities
ManilaSeoul
New Delhi
Kuala Lumpur
Taipei

5
13
7
2

4
10
3
2

38

14
11
2
5

15
17
2
1

16
6
4
2

The problem with Sydney, however, isactually finding core product to buy.
Office transactions were down some 37
percent year-on-year in the first half of2017, according to RCA, partly because
many of the best assets have alreadybeen bought and partly because owners have little incentive to sell. That said,interviewees also spoke of a good supply of incoming stock from funds that willneed to divest in order to take profits,with transactions likely to pick up in thesecond half of the year.

4

5

13

19

18

10

11

13

13

8

12

5
12

18
1

19
1

10
1

16
13

—
16

—
12

—
7

—
1

—
3

—
3

8
9
10
11
12
13
14
15
16

10
14
15
11
2
18
7
1
8

20
10
4
14
13
15
6
12
19

20
15
3
10
11
21
2
17
16

6
17
9
8
22
18
3
20
11

15
17
22
7
20
11
1
19
6

6
20
21
5
15
13
11
9
14

8
18
19
7
3
4
14
10
17

12
16
18
3
8
2
17
14
19

16
17
15
12
7
3
20
4
18

9
14
4
6
10
5
20
12
18

7
—
1
9
17
11
19
10
8

17

20

22

22

12

8

—

—

—

—

—

—

4

18
19
20
21
22

3
17
13
19
22

8
7
16
21
17

8
7
14
12
18

4
15
21
14
16

12
14
21
5
9

18
19
12
17
8

20
16
5
15
13

20
4
10
15
11

19
6
9
10
8

19
7
13
11
16

18
13
14
15
5

3

Emerging Trends in Real Estate® Asia Pacific 2018

6
9
5
1

The big draw this year, however, is that
Sydney is still able to offer strong rental
growth, with projected net effective
increases for office assets over the
next three years of 5 percent annually,
according to CBRE. Unsurprisingly,
Sydney remains popular with international investors, who represented abouta third of total transactions in the firsthalf of 2017, according to JLL.

4
5
9
6

Note: — = no data.

6
9
1
2

Sydney (first in investment, first in
development). In many ways, Sydney’s
appeal is the same as it has been foryears—as a major city in a matureeconomy, it is one of a handful of destinations in the Asia Pacific that combinesa reasonably deep and liquid market ofcore assets with a better-than-average
yield (for prime office, 5 percent or less).

2
3
11
9

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

3
7
1
2

Top Investment Cities

With stabilized assets so hard to find,investors have adopted a number ofstrategies. Build-to-core and forward
8

good

7

Investment
prospects
5.97
5.81

6
5

fair

Development
prospects
Sydney2
10

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

Chapter 3: Markets and Sectors to Watch

funding remain go-to approaches, while
many existing owners (usually domestic
funds) are also opting to redevelop older
properties in their portfolios rather thantrying to buy. As a result, Sydney alsoranks first in the rankings for development prospects. A significant numberof ongoing projects initiated by mainly
Chinese developers to convert Grade-B
offices to prime residential sites in thecity center are also underway. With
some of these now experiencing cashflow problems as a result of capital
control restrictions in China, a numberof interviewees indicated potential for
providing bridging finance to keepthese projects moving forward.
Another option many investors in
Sydney, including foreign funds, are
now willing to pursue is investing in
outlying areas. According to one: “It’sincredibly hard to get access to highquality real estate because it’s tightly
held, so either you’re paying record
cap rates or you’re going to secondary
markets like Parramatta or North Ryde
where there’s still a very attractive yieldspread to the CBD.” New transportation
infrastructure is now making these outlying districts increasingly appealing.
Melbourne (second in investment,
third in development). Melbourne’s
appeal as an investment destinationis very similar to Sydney’s—a mature
market, high-quality core assets, andrelatively good yields by Asian standards. Again, occupational markets
remain strong, with high demand andlittle new supply leading to projected
5.5 percent annual net effective rental
growth over the next three years,
according to JLL. Prime office yields
of around 5 percent are expected tocompress further over the next coupleof years as supply tightens in an environment of strong demand from bothforeign and domestic buyers.
As with Sydney, however, investors arehaving problems getting money into
the market due to a shortage of stock
available for sale. Office transactions—

8

good

7

8
Investment
prospects

6

5.96
5.68

fair

Development
prospects

5.67
5.42

4

fair

3

2

0

6
5

3

1

Investment
prospects

7

5
4

good

Development
prospects
Singapore

2
Melbourne

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

having fallen already in 2016—dropped
further in the first half of 2017, to around
A$315 million, or about half the figure
recorded in the first half of the previous
year, according to CBRE figures. Withstrong demand continuing, yields are
expected to compress further from thecurrent level of around 5 percent.
Residential prices in Melbourne havecontinued to rise (up 12.1 percent
year-on-year in the first three quartersof 2017) in defiance of government
containment efforts, driven by strong
population growth and rising activity
from international buyers, particularly from China. High prices paid forresidential plots by Asian developers
have also created additional pressure
for future price rises, although buying
has now fallen off following impositionof tighter rules on capital exports by the
Chinese government. With new residential supply about to hit the market andtighter lending restrictions on mortgages
leading to slower sales, expectations
are rising that the market may havepeaked.
Singapore (third in investment, sixthin development). After two years of
declining rents caused by a sluggish
economy and a glut of supply, the promise of a bottom in Singapore’s officemarket has caused its ranking to soar
from next-to-bottom last year to third
in this year’s table. Office rents havefirmed probably earlier than expected,
while completion of the region’s second-

1
0

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

biggest office deal in September 2017
has now galvanized the local market
and set a floor for valuations. Several
core office transactions have takenplace this year, with foreign funds buying actively.
Others, however, see talk of a bottoming as premature. According to one
fund manager active in the market:“Singapore’s still in a difficult place.
They don’t have a lot of business
confidence, there’s quite a lot of supply
and not a huge amount of expansion.
It’s challenging to bring foreign workers in because the government has
responded to local concerns to protect
jobs, and at the same time a lot of theEuropean banks are downsizing, whichhits demand for space. I don’t want tobe negative, but we’re not seeing a big
pipeline of deals that interest us.”
The residential sector is also showing
signs of bottoming, with rising transactions and a slight uptick in pricing for the
first time in four years. Driven by buoyant sentiment, sales of developer sites
have surged amid tightening supply
as developers add to land banks. The
rebound seems likely to be sustainable,
given the momentum of several years’
worth of pent-up consumer demand.
Chinese developers have been especially active in buying land, pushing up
land auction prices for residential sites
significantly through 2017.

Emerging Trends in Real Estate® Asia Pacific 201839

8

ing amount of current activity into fringe
CBD or outlying parts of the city.

good
Investment
prospects

7
6

5.66
5.48

5
4

fair

Development
prospects

3210Shanghaipoor’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18

Shanghai (fourth in investment,
fourth in development). This year,
Shanghai has performed better than
expected. Transactions have been
driven partly by surging demand fromdomestic buyers who have been barredfrom exporting capital as a result of agovernment regulatory crackdown, andpartly by foreign core funds flush withnew capital they need to deploy. As aresult, “overbidding has been crazy,” as
one investor put it, with yields tightening
to under 4 percent in some cases.
That may seem unusually compressed
for a developing market, but Shanghai
has probably transcended that status
given it is already the epicenter forbusiness in China and probably
destined to become a major global
financial center sooner rather than later.
Investors have always played the rental
growth/capital appreciation card in
Shanghai, often in defiance of conventional wisdom. Given strong ongoing
demand for office space, there seems
no reason at present to think it will notplay out again, even if there is a lot of
new supply in the pipeline.
Another reason foreign core investors
are now targeting China is that theyknow that build-to-core strategies willalmost certainly find ready buyers in theform of Chinese insurance companies
or other institutions happy to pay top
dollar for good product. As was thecase last year, a lack of available stockin prime locations is driving an increas-

40

Emerging Trends in Real Estate® Asia Pacific 2018

Activity from opportunistic or valueadd investors, meanwhile, has fallen as
investors struggle to find product they
can differentiate from what is alreadyavailable in the market.
Ho Chi Minh City (fifth in investment,
second in development). With an economic trajectory thought to be similar toan early-day China, Vietnam now has “awave of money swilling around” as large
regional developers and an increasing
number of private equity funds makethe bet it will offer up a repeat of theMainland China experience in terms ofproperty price inflation. Bureaucracy
remains an issue, but restrictions are
slowly being eased and Vietnam today
offers probably better market accessthan do other Southeast Asian developing economies. It remains a favorite ofinvestors from South Korea and Japan.
Most investors are focused on the residential sector. Home sales and pricing
have been strong over the last three
years, but in a volatile market there aresigns the cycle may be peaking. As one
investor in Ho Chi Minh City observed:“Land costs have gone up very, verysignificantly to the stage where it’s not
an opportunistic play anymore in termsof the returns you can get. And when
you look at how developers are taking
downpayments on condos and using
those to buy more land as opposed to
8

5.76
5.66

5

fair

Investment
prospects

3

0

good

Development
prospects

6

5.47
5.41

5
4

fair

Investment
prospects

3
2

2
1

Shenzhen (sixth in investment, fifth
in development). At present, yields
on office properties in Shenzhen are
the lowest in China. At around 3.5
percent, they stand below the yield on
the Chinese sovereign bond, raisingquestions of relative value comparedwith other Chinese cities, especially inview of a big incoming supply pipeline.
Shenzhen assets have seen some of the7

Development
prospects

6

4Given the small amounts of investable
stock, those focused on the commercial
side will be looking mainly at development, usually by way of joint ventureswith local developers, who are often willing to take on partners to obtain better
access to foreign capital and technicalexpertise. Completed assets do exist,
however. With most existing stock having been built by domestic developers,
there are now opportunities to buy andfix. According to one investor: “There
are some questions around standards
and design, so it’s probably a value-add
play because you’d have to do some
sorting out. We’ve just bought an office
tower at 7 percent to 8 percent [yield]
and a retail podium in a mixed-use
development for just under 9 percent.”
Opportunities also exist to provide debt
financing, given the generally high gearing of many domestic developers.

8

good

7

putting them into their own projects, you
can see there are strains in the systemand that if the sales should slow, thetrain’s going to stop.”

Ho Chi Minh Citypoor
’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18

1
0

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

Chapter 3: Markets and Sectors to Watch

highest capital value increases in the
country in recent years.

8

good

7

One reason real estate investors are
long-term bullish about Shenzhen
is the renewed momentum of the“Greater Bay Area” (GBA) scheme, agovernment-backed project aiming tocreate an integrated city cluster from
11 metropolises around the Pearl River
Delta—including in particular Shenzhen,
Hong Kong, and Macau. While theeconomic rationale for the GBA has
been questioned, there can be no doubt
it has acted as a catalyst for significant
amounts of new property development,in particular in Shenzhen’s vast 26
million-square-meter Qianhai Free
Trade Zone.
Other new sources of demand are various local urban regeneration projects.
As traditional core areas of Shenzhensuch as Lohou and Futian fill up,
attention is morphing to nearby former
industrial zones, a process given added
momentum by the gradual relocation ofmany of Shenzhen’s light manufacturingindustries either elsewhere in China or
into Southeast Asia.
Shenzhen’s residential market was thehottest in China in 2016 but has continued to deflate slowly in 2017, largely
as a result of a local government policy(repeated elsewhere in China) requiring downward adjustments of prices
at newly developed projects. Strong
demand continues for new homes,
however, resulting in the overspill being
absorbed in neighboring townships.
These have again become new sourcesof development demand.
Tokyo (seventh in investment, 13th indevelopment). The rapid rise in rents
and asset prices over the last five years
has made Tokyo a home run for those
who invested in the wake of the introduction of Prime Minister Shinzo Abe’squantitative easing program in 2013.
But the appeal of the rental-growth playhas faded more recently as upward

Investment
prospects

6
5.33
5.16

5
4

fair
Development
prospects

3

Tokyo

2
1
0

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

pricing pressures in Japan have run outof steam.
Tokyo’s rise in the rankings this year,
therefore, has more to do with the emergence of a new type of yield-seeking
investor looking to play the spread
between the yield on the property andthat available on Japan’s sovereignbond, which currently trades at aroundzero. The spread is small but seen as asafe and stable way to outperform thealternative—investing in the sovereign
itself. As one fund manager said: “Evenat these eye-popping low cap rates,
you can still get 200- to 300-basis-point
spreads over the government bond.”
With office rents stagnant and a looming problem with incoming supply,
many foreign investors are now rotating
instead into residential assets, which
are perceived to be a safer option. As
a result, however, competition for stock
has increased and residential yields
in some cases have quickly declined
to less than 3 percent, according to
one investor.

especially for residential—we like it andare now actively looking for development projects because you can build
to where rents are. The problem has
been in finding available land, partly
because there’s no pressure to sell but
also because a lot of it has already been
built out over the last couple of years.
So what we’re buying now are buildings
upon completion by small and midsizeddevelopers.”
Guangzhou (eighth in investment,
tenth in development). With officerents in Guangzhou about half those in
Beijing and Shanghai, the city remainsa (relatively) poor cousin of its northernpeers. Nonetheless, solid economic
growth means that demand for Grade-A
space remains strong. So while vacancies are high (at about 10 percent) anda substantial pipeline of new supply ison the way, the fact that relatively little isbeing built in core submarkets means
there is actually a shortage of available
space in the best-quality buildings.
Rental growth for prime properties
therefore remains strong, growing
at an annualized rate of 6.1 percent
year-on-year in the first half of 2017. It
is expected to remain strong going forward. Investment activity also has beenhigh in the first half of 2017, althoughspiking activity represents just a handfulof major deals rather than any fundamental change in the market.

8

good
Development
prospects

7
6Tokyo is not a destination where foreign
investors have traditionally looked to be
involved in development plays givenhigh construction costs and a market
historically dominated by local developers. This explains Tokyo’s low showing
in the development rankings. Times
are changing, however. According to
one locally based fund manager: “Theeconomics on development now works,

5.28
5.19

5
4

fair
Investment
prospects

3
2
1
0

poor

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

Emerging Trends in Real Estate® Asia Pacific 201841

Meanwhile, activity in outlying areas isbooming, with the government directing
its expansion efforts for both residential
and commercial properties toward a
handful of satellite districts. This has
provided opportunities for foreign developers to be involved in building bothbusiness parks and residential communities in these areas, linked by train androad both to Guangzhou proper andother cities in the area. One, the SinoSingapore Guangzhou Knowledge City,is a greenfield master-planned township designed to accommodate around
500,000 inhabitants. Given their scale,these types of projects favor larger
investor/developer collaborations. They
have become a theme in other major
cities in China, too.
Auckland (ninth in investment,
seventh in development). Apart fromscale, New Zealand has many of thesame attributes as Australia in terms ofinvestment appeal. Although previously
something of a backwater, Auckland
has emerged swiftly from the shadowsin recent years as investors pursue thegenerally higher yields on offer.
While office cap rates have now compressed, they remain quite high by
Asian standards at around 6.1 percent,according to JLL. With a limited supply of good-quality buildings, officevacancy continues to be tight (less than
1 percent for premium buildings). As
a result, Auckland has been targetedby international capital (much of it from
8

good
Development
prospects

7

Auckland

6
5.33
5.23

5
4

fair
Investment
prospects

3
2
1
0

42

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

Emerging Trends in Real Estate® Asia Pacific 2018

Singapore and China) looking to develop
new space, which is now beginning toarrive in earnest. Most of this has been
pre-leased, suggesting that demandremains strong. Higher rents for theseproperties mean that rental growth iscontinuing, and an emerging market forvalue-add plays has now been createdby rising vacancies in buildings that tenants have recently vacated. The market
may take time to digest the new supply, however. According to one locally
based broker: “With supply increasing,landlords are more focused on fillingspace and securing finance as opposed
to rental growth.”
The New Zealand retail sector also has
good prospects given local planninglaws that create problems building new
shopping centers. Hotels, meanwhile,
are a “hot subsector” due to ongoingincreases in tourism arrivals, particularly
from China.
Residential prices have mushroomed in
New Zealand, with housing costs continuing to rise despite new taxes aimed
at deterring speculators. Unaffordability
is now acute, and the government
seems set to introduce rules similar
to those in Australia that tighten market access to foreign buyers. In themeantime, opportunities have emerged
to build affordable properties, in particular low-rise apartments. Even here,
however, efforts have been complicatedby soaring land costs that have eroded
development margins.
Osaka (tenth in investment, 15th indevelopment). Investment in provincial Japanese cities has boomed in2017 as investors migrate away from
Tokyo looking for higher yields and lesscompetition. Osaka has emerged asa favorite play, followed by Yokohama,Fukuoka, and Nagoya. In many ways,
Osaka can be considered the poster
child for core investors now taking refuge in secondary markets. According to
one Tokyo-based investor: “One of thethings to keep in mind is that Japan ischanging to a service-based economy,

8

good

7

Investment
prospects

6
5.12
4.99

5
4

fair
Osaka

3

Development
prospects

2
1
0

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

and so if you look at where Osaka ispositioned, because of the lower cost ofliving and much lower overall operating
costs compared to Tokyo, it’s a greatplace to be for service-based businesses because you don’t have to pay
high wages.”
Although commercial property investment in Tokyo fell in the first half of 2017,higher inflows to provincial assets meanthat overall volumes in Japan rose some
14 percent year-on-year, according to
RCA. Buyers now include domestic
REITs, which previously refrained frominvesting outside of Tokyo.
Traditionally, cap rates in provincial
cities are some 100 to 200 basis points
above equivalent prices in the capital.
Yields have compressed significantly,
however, and in many cases havefallen below this threshold, with Osaka
offices now trading at yields as low as
3.6 percent. Capital values, meanwhile,
have increased 18.4 percent and rents
7.1 percent year-on-year in the first halfof 2017, according to JLL. This is partly
due to rapidly declining vacancy rates,
but the reality is that the easy money
for this trade has probably alreadybeen made. At the same time, declining demand among (especially foreign)
investors for Japanese office assets
means that investment levels in the
sector appear to have plateaued. Whilesome have switched to the residential
sector as a result, yields have now also
compressed here, leading some toChapter 3: Markets and Sectors to Watch

question the relative value of Osaka residential assets compared with equivalent
properties in Tokyo.
Beijing (11th in investment, 17th indevelopment). Despite a steady pipeline of newly developed office buildings
over the last two years, Beijing continues to show a seemingly unquenchable
thirst for new space, partly as domestic
companies nationwide continue toestablish headquarters in the capital.
This means fewer assets trade in Beijing
compared with Shanghai. According to
one fund manager: “There’s very strong
absorption of space for self-use in themarket, especially in the financial andtech industries, so it’s very hard to findquality assets that come to market—
you’re seeing cap rates going in at
sub-4 [percent] in those spaces.”
It also means that fundamentals haveremained strong. Vacancies are fairlylow (at around 6 percent) and rents
have shown only marginal declines
from levels that currently make themthe second highest in Asia after HongKong. Incoming new supply in non-CBD
districts (including a long-term plan torelocate more government and private
sector offices to satellite cities) will
alleviate downtown demand pressure
to some extent, but with limited spaceremaining in the most popular CBD andfinancial district areas, rents and values
there are likely only to increase.
8

good

7

Investment
prospects

6
5.10
4.94

5
4

fair

3

Development
prospects
Beijing

2
1
0

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

The high amount of aging and mispositioned stock in Beijing has provided newscope for value-add/conversion plays,
with many landlords or investors looking
to find suitable retail or hotel assets toconvert to office space, targeting 30 to40 percent rental increases as a result.
Stringent conditions set by the government for new land auctions in thecapital, including price ceilings for sales
prices of finished properties, meanthat developers have little prospect ofmaking a good margin (or, at times, any
margin) when buying land for residential. As a result, auction prices and landsales have plunged, although there
have been several plots that have soldrecently at levels that mean developers
will necessarily take a loss.
Mumbai (12th in investment, eighth indevelopment). Of all India’s major cities,
Mumbai is the one least dominated by
IT-sector demand. This means it has
to some extent missed the opportunity in the business outsourcing boom
that has been so apparent in cities like
Bangalore. At the same time, Mumbai
remains the financial capital of Indiaand so has benefited from the recent
strength of India’s capital markets.
Absorption has therefore been strong,
driven also by demand in coworking,manufacturing, and services companies.
Although steadily declining, Mumbai’s
office vacancy rate (at around 17 percent) continues to be very high, and witha pipeline of incoming supply totaling
about 40 percent of existing stock, fundamentals would appear to be negative.
In reality, however, Mumbai continues
to lag behind in term of Grade-A stock,
meaning that any new supply is quickly
taken up and that rental growth for those
properties remains strong. According
to one fund manager active in India:“Longer-term, India is going to lead theheadlines in supply/demand statistics—it’s a market where relevant supply
means much more than total.”

8

good

7

Development
prospects

6
5.20
5.04

5
4
3

fair

Investment
prospects

Mumbai2
10

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

Another sector now drawing increasing
foreign investment interest is retail. While
Mumbai has a general shortage of goodretail space, which therefore creates
demand, the question of location isespecially important because of the
sheer size of the metropolis. According
to one fund manager: “There are today
maybe five good malls in Mumbai, but
to get to locations in the center of town
from outlying parts can take two hours,
which means many people might aswell not go. So, if you get the location
wrong, then obviously malls don’t work.
It also leads to the belief that e-commerce has to pick up at some point
because it’s very difficult for people
to go to malls due to the connectivity
issues. This means logistics as a sector—and especially with the tax reforms
currently going on in India—could be
more interesting.”
Hong Kong (13th in investment, 14th
in development). The low ranking
accorded Hong Kong in this year’s
survey is once again an indication of
the lack of investment opportunity due
to high prices and a relatively illiquidmarket rather than concerns about animpending downturn. In fact, Hong
Kong’s ranking this year is several
places higher than in the recent past,reflecting a number of factors.
First, there has been a pickup in generalinvestment activity. Although Hong Kong

Emerging Trends in Real Estate® Asia Pacific 2018

43

8

good
Investment
prospects

7
6

5.04
5.01

5
4

fair

Development
prospects3210Hong Kongpoor’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18

has historically been a market wherevery little core stock trades, a number oflarge transactions made it the biggest
investment destination in Asia in thefirst half of 2017. This has been complemented by a number of very large landpurchase transactions in 2017, many
involving Chinese developers looking todiversify away from low-margin deals intheir domestic market.
On the retail front, there now seems abottom in sight after several years of
declines. As one local fund manager
said: “There have been interesting
cyclical changes in luxury retail in Hong
Kong, which has been absolutely hammered over the last several years, withrents down 40 percent and more—it
looks like that might be changing, withsales figures now showing an uptake.”
Another interesting development has
been the uptick in interest among
foreign core fund managers looking tofind value-add investments as opportunities in more active core markets in
the region fade. Hong Kong provides
good scope for such deals because
the rental differential between Grade-A
and Grade-B buildings is much greaterthan it is in other markets. As a result,both foreign and local players are now
looking for potential repositioning deals,
very often with coworking or co-living
potential in mind.
Finally, activity continues to pick up in
the secondary CBD area located in east

44

Emerging Trends in Real Estate® Asia Pacific 2018

Kowloon. Quite apart from several large
recent office deals in the area, the government has recently indicated interestin reviving a defunct scheme to encourage renovations of former industrial
buildings into office or possibly residential assets. This would probably reignite
interest in redevelopment plays should
it come to fruition.
Jakarta (14th in investment, 12th
in development). Interest in Jakarta
office assets has plunged in the past
couple of years due to supply concerns.
According to JLL figures, vacancies
have risen to nearly 30 percent, whilerents plunged 11 percent year-on-year
in the first half of 2017, continuing adecline that began in 2015. That said,
the market has shown itself receptive
to new supply, with good buildings
close to transportation links having no
problem finding tenants. As one local
investor put it: “Certain types of tenants
need to be in certain types of area, andwhile there’s been an adjustment, rents
haven’t gone down 50 percent. I thinkmost developers will certainly get theoccupancy and then it’ll take longer
for rentals to recover further down theline.” With incoming supply set to wane
beginning in 2018, there may be light at
the end of the tunnel.
On the residential side, the high-end
market has been hit especially hard,
although a handful of new projects inthe city center—generally mixed-use—have recently drawn surprisingly strong
responses. According to one locally
8

good

7

Bangalore (15th in investment, 16th
in development). India’s emergence
as a center for the business process
outsourcing (BPO) industry has been
led mainly by Bangalore, whose reputation as an IT center acted as a magnet
for scores of foreign companies to set
up outsourced-service facilities there.
Early foreign investors in this sectorbought income-producing assets inbusiness parks in conjunction with local
partners and scored some major successes. Some of these assets have now
been earmarked for sale, in particularvia India’s newly emerging REIT sector,
which is expected to launch its first IPO
in the first quarter of 2018.

Development
prospects

6

fairJakartaInvestment
prospects

41

1’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18

fair

Investment
prospects

3
2

poor

5.19
4.96

5

2

0

good

7

5.17
5.01

5

3

Foreign investor interest in the logistics
sector—especially that connected with
e-commerce—has now increased.
Activity will likely continue given the
shortcomings of existing infrastructure.

8

Development
prospects

64based investor, this is partly a result ofpent-up demand and partly because
investors and consumers are looking tobuy a particular type of property: “I think
firstly location is key, so anything with an
infrastructure story looks good, especially if it’s near an LRT [light-rail transit]
line. And second there’s the price point,
which also means smaller size. So,
you’re looking at the smaller one-bed
units of 40 to 50 square meters, or comfortably below the IDR5 billion [about
US$370,000] threshold that increases
tax by 10 percent.”

0

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

Chapter 3: Markets and Sectors to Watch

Today, operators of BPO facilities
in Bangalore have reported rental
growth of around 8 to 9 percent annually, together with healthy new tenant
demand. Still, Bangalore’s BPO story
may now be tapering off as the emergence of automation and artificial
intelligence technologies creates a longterm drag on demand for back-officeand customer service functions globally.
According to one fund manager active
in India: “The exuberance of the IT outsourcing to India has gone away and I
think you’re not going to see 20 percent
growth again—maybe you’ll get 5 percent to 10 percent growth or even lower.
Nowadays, occupiers are the same, but
the kind of work being outsourced hereis slightly different. There is more cloudcomputing, more robotics, AI, and thatkind of profile of work. Compared to a
BPO, they require less space because
you can’t have 5,000 software developers working on cloud computing, maybe
you need 500. So, I think the demand isless, but at the same time it will become
more sticky over the long term.”
Bangkok (16th in investment, 16th indevelopment). Thailand has endureda shaky reputation among foreign fundmanagers on account of numerous
coups and other political crises in recent
years. Its economy and real estatemarkets continue to tick along notwithstanding the problems, however, withboth rentals and capital prices trending
steadily higher.
8

good
Development
prospects

7
6
5
4

fair

3

Bangkok

4.99
4.90
Investment
prospects

2
1
0

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

Given this, the bigger obstacles forforeign investors looking to buy commercial assets in Bangkok are a shortfallof investable stock combined with a very
illiquid market. When assets do trade,transactions have long been dominatedby local developers and investors. The
same applies to prime land sites, with arelatively small number of new projects
in the pipeline. At the same time, there
has been increasing activity by capital from Japan, Singapore, and, mostrecently, China seeking to participate in
CBD office projects in partnership witha local player.
Probably the obvious option for international investors in Thailand is the tourist
sector, with new arrivals—in particularfrom China—growing hand over fist.
Resorts were the asset class mostoften mentioned by investors, therefore,
together with hotels in the capital.
The other source of potential growthfor international investors in Thailand isin the condominium market, especiallyin Bangkok, with sales to foreigners
mushrooming in the last few years.
This is providing scope for investments
by foreign groups looking to sell their
allocated portion of projects to buyers intheir home countries. In 2016, around 80
percent of foreign purchases involved
buyers in either Hong Kong or China.
Finally, one investor mentioned Thailand
as a potential location of retirement
communities for a well-heeled clientele.
China’s second-tier cities (17th ininvestment, 11th in development).
First-tier cities in China tend to suffer
less from regular bouts of overbuilding
because they continue to enjoy rapid
growth as both businesses and workers
gravitate toward the largest urban centers. That is not necessarily the case withsmaller cities, many of which have been
swamped in recent years by enormous
gluts of housing and commercial space.
Over the last two years, however,some of these cities have been able8

good
Development prospects

7
6

5.18

5
4
3
2
1
0

4.83

fair
Investment prospects
China – second-tier cities

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

to digest large amounts of excess
space. Residential assets have either
been sold off at a discount, bought by“spillover” buyers from nearby first-tiercities, or converted by local governments to low-income housing projects.
Commercial oversupply has taken
longer to deal with, but more and moresecond- and third-tier cities—interviewees mentioned in particular those along
the Yangtze River such as Chengdu,
Wuhan, Nanjing, and Hangzhou—have
now managed to work their way throughsurplus commercial stock.
With vacancy rates in these cities falling, second-tier destinations are again
working their way back up the rankings,
especially on the development side.
Some domestic and foreign investors
are now increasingly willing to consider
selective investments in second-tier cities as competition and prices heat up in
first-tier locations.
In addition, as rents and salaries in the
big four Chinese cities continue to rise,
there is increasing scope to establish
service facilities in cheaper locations.
As one locally based fund manager
said, “Some Tier 2 cities have clearly
turned the corner and have bright
futures for back-office function andfulfillment centers.”
Manila (18th in investment, 19th indevelopment). In recent years, officedemand in the Philippines has been
driven by the phenomenally success-Emerging Trends in Real Estate® Asia Pacific 2018

45

8

good

7

Development
prospects

6

Manila

5
4

fair

3

4.89
4.79
Investment
prospects

2
1
0

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

ful BPO sector. Although growth in thisarea has slowed, office fundamentals
continue to be very strong. Vacancies
stand at a low 3 percent, while rent
and capital values in the first half of2017 are up a healthy 5.3 percent and8.6 percent respectively year-on-year,
according to JLL. Land prices, meanwhile, rose between 25 and 33 percent
in the most popular areas of the city.
One investor noted the impending relocation of the Philippine stock exchange
from Makati to Fort Bonifacio, which “willmean a wholesale change to the shapeof Manila. I think it will be like [London’s]
Canary Wharf, with the finance guys
moving out of Makati where the stock
is very old and badly managed to shiny
new buildings where currently there issome vacancy. Makati will probably
be backfilled with BPOs, so structuralchange is going to happen.”
To the extent that BPO growth has
slowed, the slack has been taken up
by new demand from offshore online
gaming companies, which are now thesecond-largest occupier of office spacein metro Manila after the BPO sector,
according to local brokers Leechiu
Property Consultants. One investor
questioned whether this was a sustainable trend, however.
Sentiment among overseas investors
has recently been dented by politicalcontroversies, an on/off territorial rights

46

Emerging Trends in Real Estate® Asia Pacific 2018dispute in the South China Sea, andongoing fighting with insurgents in thesouth of the country. There seemed
plenty of opportunistic funds willing toinvest in Manila, however, with one noting there is “definitely demand for more
office space” in Manila. At the sametime, however, more than one interviewee complained of the difficulties offinding good partners.
Comparing it favorably to investing inIndonesia, one investor said: “I thinkthey [i.e., local developers] generally
would love to have a partner and theywould be happy to give you the controlsthat you want and be institutional about
it, which I’m not sure most of the groups
in Indonesia, for example, would do.
That being said—and this is an issue
across Southeast Asia, except possibly Vietnam—the returns that local
or regional Southeast Asian groups
will develop at are pretty low, so on arisk-adjusted basis that makes it a bit
challenging. We have the big Filipino
groups who’d be happy to develop at
12 percent IRR in the local currency,
and it’s kind of hard to justify that.”Seoul (19th in investment, 22nd indevelopment). Despite its lowly ranking (likely due to the current crisis with
North Korea), Seoul continues to featureprominently on the radars of many corefund managers in the region, mainly
because it trades at yields slightly
higher than other Asia Pacific coremarkets such as Tokyo and Australia.
In addition, the yield spread between
effective rents (around 4 percent) andthe local sovereign bond (around 1.8
percent) is quite wide.
Most investors are focused on buying stabilized office assets, although
fundamentals have recently been weak.
Value-add strategies are now becoming more popular, a logical move giventhat much of the local office stock isquite old. However, few foreign investors appear willing to take developmentrisk—a surprising stance given thatmany are happy to do so in appar-

8

good

7

Seoul

Investment
prospects

6
5
4

fair

3

4.78
4.75
Development
prospects

2
1
0

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

ently riskier markets such as China.
According to one investor, development in South Korea can be a profitable
exercise due to dysfunctionalities in theway that construction is financed, whichleads to poorly designed stock and a
preponderance of strata-title buildings.
Build-to-core development is therefore
a realistic option because there is a lackof available prime en bloc assets.
Another asset class currently popular inSouth Korea is logistics, which, according to one analyst, “is like Japan 15
years ago.” The big global operators
have been slow to develop in Seoul,
meaning that much of the existing infrastructure is aging and of poor quality.
Recent new investment in the sector
now threatens to create oversupply, butthere remains scope to develop for theright type of facility in the right location,
given especially that logistics assets
in South Korea are currently trading atyields around 100 to 150 basis points
above those for offices.
New Delhi (20th in investment, 18th
in development). New Delhi remains
unpopular with investors compared withother major Indian cities. According to
one local interviewee, this is mainly due
to an emphasis on development in theresidential sector, which has recently
been in a downtrend. While this hascreated opportunity to supply bridging finance, not many foreigners havepursued this option.

Chapter 3: Markets and Sectors to Watch

8

good

7
6

8
Development
prospects

7

New Delhi

fair

3

4.92
4.75
Investment
prospects

2
1
0

8

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

As a group, northern India developers tend to be overleveraged and areoften holding large portfolios of highend housing, an asset class that is inoversupply. Many projects have been
subject to long delays and some developers have acquired poor reputations
as a result. In the words of one local
interviewee: “Delhi continues to suffer,
but that also means for people who
understand the story there is greater
potential—the moment the [residential]
markets turn, Delhi will be one of the first
cities to start seeing a pickup.”
In the office sector, Delhi missed its
chance to grab a share of the surging
growth seen in business parks locatedin the south. Although there has beensome recent demand from IT companies, uptake overall has been slow,
leaving office vacancies at an elevated
30 percent, according to JLL. As aresult, Delhi has “been a bit on the backfoot when it comes to absorption, but ingeneral rentals have been holding firm.”
As in Mumbai, however, rents are higher
and vacancies lower for prime properties in good locations.
Kuala Lumpur (21st in investment,
21st in development). Markets in Kuala
Lumpur have remained stagnant overthe last year, with oversupply continuing
to pose problems given very moderatelevels of take-up as multinationals in
the oil and gas sector downsize. CBD

1
0

4.77
4.52

fair
Development
prospects

32Development
prospects

6

5
4

good

7

Investment prospects

6

5
4

good

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

vacancy rates have inched up to around
15 percent, according to JLL, and areunlikely to subside any time soon given
elevated rates of incoming stock. Rents
have so far remained flat, but many analysts expect they will trend downward
over the next few years.
As one fund manager observed:“Sentiment among consumers is quite
low and a little bit shell-shocked at the
moment. There’s just oversupply ineverything everywhere you look. It’sa very insular market and I’ve beensniffing around there in the last year tosee if there’s a breakout. But not yet. If
something isn’t leased up yet, you’ve
got massive lease-up risk.”
The same situation applies in theresidential sector, where the numberof unsold units has continued to rise,leading developers to delay launches.
In particular, previously strong demand
from Chinese buyers has softened as aresult of capital controls imposed by the
Chinese government. This has affectedin particular the enormous developments now underway by Chinese
developers in the southern city ofJohor Bahru.
Taipei (22nd in investment, 20th indevelopment). Although the government changed the law a few years
ago to force Taiwan’s cash-rich insurance companies to invest their capital

5
4

fair

Investment
prospects

Taipei

4.83
4.45

3
2
1
0

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

in markets outside Taiwan, the local
commercial property market remains
captive to institutional owners, with very
few assets trading and yields that aresome of the lowest in Asia, at around 2.4
percent. Investment activity in the firsthalf of 2017 was 58 percent lower thanin the same period of 2016 as buyers
refused to accept high asking prices.
As a result, most recent activity has
focused on redevelopment projects, as
insurance companies move to upgrade
aging stock.
Foreign investor participation remains
minimal, not least because there is very
little to buy. That said, there has recently
been some pickup in foreign investmentin the commercial sector. In particular, a large hotel sale and lease-backacquisition was sealed in late 2017,
while an upcoming US$2 billion project
to develop two large mixed-use projects
near Taipei Train and Airport-link MRT
stations is also expected to involve
foreign investors.
The residential market remains weak,although after two years of pricedeclines resulting from higher government property transaction taxes, it may
now have hit a bottom. Sales volumes
are increasing, prices have inched
up, and land transactions also have
improved as developers begin to add
to land banks. That said, affordability
remains a major issue.

Emerging Trends in Real Estate® Asia Pacific 201847

Beijing

Seoul

Osaka

Shanghai
New Delhi

Guangzhou

Hong
Kong

MumbaiBangalore

Shenzhen

BangkokTokyo

Taipei

ManilaHo Chi
Minh City
Kuala Lumpur

Singapore

Jakarta

SydneyMelbourne

Leading Asia Pacific Cities
Investment prospects
Generally good
Fair
Generally poor

48

Emerging Trends in Real Estate® Asia Pacific 2018

AucklandChapter 3: Markets and Sectors to Watch

Exhibit 3-4 Prospects for Commercial Property Types in 2018
Development prospects

Investment prospects
Industrial/distribution 6.10

Industrial/distribution 6.03

Data centres 6.04

Shared/serviced offices 5.95

Shared/serviced offices 6.04

Data centres 5.83

Office 6.00

Senior housing 5.81

Senior housing 5.79

Office 5.78

Student housing 5.77

For-sale residential 5.70

Multifamily/rental residential 5.69

Student housing 5.66

Affordable housing 5.69

Multifamily/rental residential 5.64

For-sale residential 5.64

Affordable housing 5.63

Business parks 5.50

Business parks 5.40

Hotels 5.45

Hotels 5.30

Self-storage 5.42

Self-storage 5.25

Resorts 4.96

Resorts 4.77

Retail 4.94

Retail 4.74

1
2
Abysmal

3

4

5
Fair

6

7

8

9
Excellent

1
2
Abysmal

3

4

5
Fair

6

7

8

9
Excellent

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

Property Types in Perspective
OfficeThe office sector continues to be the go-to option for mostinvestors, although to a certain extent the shine has come
off this year as more fund managers come to the conclusionthat rental growth is slowing regionally. That’s a problem for acouple of reasons. First, because with yields so low it implies
capital values may have hit a ceiling too. Second, because
those same low yields mean leverage is no longer playing a
big part in boosting returns. In markets such as China andHong Kong, for example, the spread between the asset yieldand the borrowing cost is now minimal, which means, as one
fund manager said: “In order to get superior returns, you’re notgetting any benefit from the leverage; it’s all about the rental
growth you’re able to generate out of the asset.”Opinions on rental growth prospects were quite polarized,
however, with many investors convinced that rents will continue to rise, at least in many markets. While they are expected
to flatten in Tokyo, therefore, rents in Australia are projected tosee strong growth. Investments in developing markets havealso been predicated on the basis of steadily rising rents. Thebalance of opinion therefore lies somewhere in the middle. As
one investor said: “The overall supply/demand situation is stillquite favorable for landlords; so while rental growth may not

be what it was in the past seven years, it should still continue
at a lower level.”
Expected best bets: With GDP growth soaring amid a structural undersupply of office space, Ho Chi Minh City is now afocus of attention. But predicting growth is one thing, profiting from it is another. One foreign investor spoke of buying
finished assets in Ho Chi Minh City at a 7 to 8 percent yield,with a view to upgrading them as a value-add play. In reality,
though, the acute shortage of investable stock in Vietnam
makes development the more realistic option, though evenhere pickings are thin. That said, local developers remain
open to partnering with foreign capital, and there is also
scope for providing debt to Vietnamese developers who
as a group are generally short of cash.
Singapore has shot up the office rankings this year as
investors anticipate a rebound in a market that has been in
decline for several years. Although some remain skeptical that
fundamentals in Singapore are really improving, the balanceof opinion was summed up by one fund manager, who said:“Singapore tends to be quite cyclical. Rents have come off
20-something percent since the peak in this current cycle,
so we think we’re now at the bottom, and that suggests rental
growth going forward for a couple of years.”

Emerging Trends in Real Estate® Asia Pacific 201849

Exhibit 3-5 Office Assets Buy/Hold/Sell
Recommendations for 2018, by City
Buy

Hold

Sell

% of total

Ho Chi Minh City 64

31

5Singapore 41

49

Bangalore 40

49

11

Jakarta 39

47

14

Shanghai 39

42

19

Melbourne 38

46

16

Osaka 34

47

19

Sydney 34

48

18

10

Mumbai 33

56

11

New Delhi 30

58

12Shenzhen 29

49

22

Tokyo 29

50

21

Auckland 28

60

12
19

Beijing 26

55

Guangzhou 25

58

17

Manila 25

54

21

Bangkok 21

72

7

China – second-tier cities 21

43

36

Hong Kong 20

58

22

Seoul 20

59

21

Kuala Lumpur 9

52

39

Taipei 9

70

21

0%

20%

40%

60%

80%

100%

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

Shanghai’s strong showing is something of a surprise given
the way prices have mushroomed (offices now trade at sub–4
percent) as local institutions rush to place funds regulators
have barred them from deploying internationally. Some foreign
investors said they were now sitting on their hands watching the action, but more than a few others have a mandate
to deploy major amounts of capital in Shanghai and are now
moving to do so, irrespective of the squeeze. Given the overall
weight of money looking to buy in China—both foreign anddomestic—cap rates seem likely to remain under pressure
for the foreseeable future.
Of the two major core markets in the region, sentiment forAustralian offices is predictably strong given expectations forongoing rental growth (with the caveat that actually placing capital is now harder than ever), while Tokyo’s improved
showing from last year’s mid-table ranking is the result of achanging of the guard—less activity by rental growth capitaland more from safety-seeking institutional and private capital.
These yield-driven investors are happy to buy Tokyo officeassets that are tightly priced (at sub–3 percent) but still enjoy

50

Emerging Trends in Real Estate® Asia Pacific 2018a positive spread in terms of both the yield on the local sovereign bond and the cost of borrowing, which allows them toboost returns by adopting a degree of leverage. As one fundmanager observed: “Japan is one of the largest savings markets on the planet and if your risk-free return is negative, youlose money by keeping it with the bank, so very modest levels
of income return then become extremely attractive.”

Residential
Prospects for investment in residential assets tend to vary bymarket depending on individual circumstances. In China, forexample, margins have declined from some 20 to 30 percent
margins ten years ago, to 0 to 5 percent today. This is one
reason for the ongoing exodus of Chinese developers tointernational markets, where development yields are usuallysignificantly higher. Sentiment also varies according to theimpact of government efforts to curtail surging home prices—
these are now becoming important in Australia and New
Zealand and have been a factor for several years in other markets from Taiwan to Singapore to Hong Kong and to China.
This year has also seen a rising supply of build-to-rent properties arriving in Asian markets (apart from Japan, where they
have long been popular). While these are different from thetraditional Western multifamily model in that individual unitsin Asia tend to be much smaller and to focus on a younger
demographic, they are likely to emerge as a long-term theme
because home prices have now moved out of reach for somany people in Asia, leaving them no choice but to rent.
Expected best bets: Given the shortage of existing commercial assets in Vietnam, foreign investors are looking instead at
the residential sector, where demand is both strong and growing. The first batch of investors entered the market as long as
ten years ago and endured a torrid time, but are now reaping
the rewards as they exit. According to one such investor:“Having had a difficult seven or eight years, everything hascome good—we’re selling sites for 50 percent to 60 percent
above NAV. People are just prepared to pay, if you like, tomorrow’s price to get good sites.”
This tells the story of both the long-term nature and the bustto-boom dynamics of the market in Vietnam (and, indeed,
developing markets generally), where today “things are looking rather frothy, especially in the condominium market, where
there are signs of oversupply.” According to one investor:“Because a lot of people are wandering around with a lot of
cash, the prices have gone sky high and that’s hard to justify.
They’re anticipating a lot of future growth, but when you start
to compare the rentals against somewhere like Bangkok,
which has a much larger economy, they’re higher and theyshouldn’t be, because there’s a relativity to the size of youreconomy, and the income of your people, and how muchthey can afford to spend on property.”Chapter 3: Markets and Sectors to Watch

Exhibit 3-6 Residential Assets Buy/Hold/Sell
Recommendations for 2018, by City
Buy

Hold

Sell

% of total

Ho Chi Minh City 63

29

8Singapore 45

47

8Bangalore 40

42

18

Jakarta 36

53

11

Manila 35

52

13

Shanghai 33

49

18

Bangkok 32

56

12

Melbourne 31

37

32

Shenzhen 31

45

24

Tokyo 31

49

20
16

Mumbai 29

55

Guangzhou 28

56

16

Beijing 27

50

23

Osaka 25

57

18

Sydney 25

49

26
30

Auckland 2248

New Delhi 2256

22Hong Kong 21

49

30

Taipei 21

68

11

China – second-tier cities 16

47

37

Seoul 1566

19

Kuala Lumpur 13

62

25

0%

20%

40%

60%

80%

100%

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

The Singaporean story on the residential side mirrors that ofoffice—the market has seen a prolonged downturn but has
possibly now bottomed, helped on its way by a partial lifting ofgovernment cooling measures. This does little to help investment funds, however, because extra costs in the formof applicable stamp duties are a drag on returns.
Otherwise, residential markets in Melbourne and Sydneyrank reasonably high, reflecting the ongoing upward spiral inAustralian home pricing. Although home values in both cities
appear to have plateaued for now, demand from both foreignand domestic sources remains very strong, and it remains
to be seen whether government attempts to stem the tide bytaxing purchase transactions will be any more successful inAustralia than they have been in many markets across Asia.
Finally, Tokyo residential assets have seen a surge in interest
among investors who are now fleeing the office sector looking for a more stable source of returns. Tokyo multifamily hashistorically always provided this and will probably continue todo so whether or not it generates rental growth, an issue on

which investor opinions vary. However, with yields currently
averaging around the 4 percent mark, unlevered returns on
Tokyo residential are at least 100 basis points better thanthey are for office assets, which makes for appealing returns
given Japan’s low cost of debt. As one fund manager said:“Unlevered returns look awfully expensive. But when you borrow at less than a point, all of a sudden you’ve got a 6 percent
cash flow net of everything, and you can’t buy that anywherearound the world.”

RetailAs the challenge posed by e-tailers to Asia’s conventional
retail malls continues to grow, owners and investors are
casting around for strategies that will ensure existing assets
remain profitable. Perhaps unsurprisingly, retail featured last in
our rankings for commercial property prospects.
Opinions among interviewees, however, were divided. Somesaw the threat as existential unless retailers changed businessmodels and updated what they were able to offer consumers
from an experiential point of view, noting that many retailers
had not sufficiently evolved their offerings and anyway didn’t
understand what consumers really wanted. As one Australiabased interviewee said: “There appears to be a reluctance togo out and talk to customers and spend time watching what
they do and what their habits are.”
Others saw Asian malls as already differentiated from thedepartment store–anchored model commonly found in the
United States, with many already moving to adopt higher
levels of food and beverage or entertainment offerings. In
addition, they pointed out, as the ongoing migration of Asian
populations to the cities continues, demand will persist forneighborhood facilities selling nondiscretionary items that are
not so threatened by e-commerce sales. In addition, uptakeof new technology such as heat mapping—whereby malls
follow consumers’ progress around malls via wi-fi connections
on smartphones—is also helping landlords squeeze better
efficiencies from existing facilities.
Expected best bets: Once again, Ho Chi Minh City tops
the rankings. However, while the steep growth trajectory ofVietnamese consumer spending will doubtless continue(official statistics show retail sales growth of 11 percent yearon-year in the first nine months of 2017), both Vietnam ingeneral and Ho Chi Minh City in particular have an oversupply of retail assets, with the latter more than doubling the floorarea of shopping center space in 2015–2016, according to
CBRE. A huge pipeline of incoming supply—some 500,000
square meters’ worth—is also set to arrive over the next
three years, once again more than doubling existing supply.
Such as they exist, major opportunities in the retail spacehave tended to fall to the large integrated developers fromSingapore and Hong Kong.
Emerging Trends in Real Estate® Asia Pacific 201851

Exhibit 3-7 Retail Assets Buy/Hold/Sell
Recommendations for 2018, by City
Buy

Hold

Exhibit 3-8 Industrial/Distribution Assets Buy/Hold/Sell
Recommendations for 2018, by City
Buy

Sell

Sell

Ho Chi Minh City 38

41

21

Ho Chi Minh City 55

36

9Bangalore 28

45

27

Jakarta 55

38

7

Jakarta 25

47

28

Shenzhen 53

38

9Mumbai 24

53

23

Bangalore 51

41

8Tokyo 24

54

22

Beijing 49

33

18

Manila 22

53

25

China – second-tier cities 48

33

19

Shanghai 21

49

30

Guangzhou 48

39

13

Auckland 20

45

35

New Delhi 47

45

8Melbourne 20

50

30

Shanghai 47

42

11

New Delhi 20

54

26

Mumbai 45

53

2

Osaka 19

53

28

Manila 44

42

14

Sydney 19

47

34

Sydney 43

42

15

China – second-tier cities 18

36

46

Kuala Lumpur 41

45

14
16

Shenzhen 18

53

29

Singapore 40

44

Hong Kong 17

50

33

Seoul 38

53

9

Seoul 17

50

33

Melbourne 37

43

20

Guangzhou 16

46

38

Auckland 33

52

15

Singapore 14

53

33

Hong Kong 33

54

13

Beijing 12

50

38

Bangkok 30

58

12

Bangkok 11

66

23

Tokyo 29

61

10

Taipei 96427Osaka 2565

10Kuala Lumpur 8

55

37

Taipei 23

58

19

100%

0%

0%

20%

40%

60%

80%

20%

40%

60%

80%

100%

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

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

Meanwhile, Shanghai also has moved strongly up the rankings. It is probably fair to say that while China in general has
many poorly conceived and performing malls, it is also moving quickly to embrace new technologies and retail formats as
it adapts to the threat posed by exponential growth of internet
retailers. Nowhere is this more so than in Shanghai, which insome ways has become something of a testing ground forhow malls can adapt to e-tailing pressure.

to JLL. Many of the big players are developing portfolios ofassets, while others are acquiring facilities piecemeal.

Finally, the upward progress of Hong Kong from its low position last year is also noteworthy, likely reflecting the rebound of
a sector hard hit—at least at the high end—by the steep fall in
Mainland tourists visiting the city.

Industrial/Distribution
As exhibit 3-4 shows, survey results confirm that investors
continue to see industrial/distribution assets as the mostappealing of all commercial property types. Most activity
is occurring in China, Australia, and Tokyo. Across the Asia
Pacific, transactions hit US$61 billion in the first half of 2017,
up from US$54 billion in the same period of 2016, according
52

Hold% of total% of total

Emerging Trends in Real Estate® Asia Pacific 2018

Demand reflects ongoing structural undersupply across theregion, especially as e-commerce sales continue to grow andas evolving retailing models at brick-and-mortar stores cause
them to hold goods at warehouses rather than in-store. Thereis now increasing demand for facilities with modern designs
such as multiple entrances and floors, together with inner-city
facilities that can cater to last-mile deliveries—probably thehottest growth area in the sector today.
According to one fund manager: “There are a number ofpeople looking at the sector, so there’s no shortage of competition, but the supply/demand dynamics for contemporary
modern logistics in Asia still seems pretty good, and myguess is that it’s got legs.” And in the words of another: “Oneof the things we like about logistics is that the build cycle isshort. Compared to a conventional building where it’s a fouryear build plan, logistics tends to be a 12-month build cycle
and we like that because the market can then correct quicklyChapter 3: Markets and Sectors to Watch

by cutting off supply, whereas if it’s a big multiuse you’ll still bedelivering for the next four years.”

10 percent, the investment landscape has something of agold-rush feel to it.

Expected best bets: Shenzhen has retained its top ranking
from last year. In addition, most other Mainland cities also
feature strongly, with development pipelines across China
bigger than all the rest of Asia put together by an order ofmagnitude, according to CBRE statistics. Chinese demand isso high for a number of reasons: the sheer size of the country
and its economy, the previous lack of any modern facilities,
the government’s longstanding infrastructure buildout policies,and extremely fast growth in its e-commerce industry.

HotelsThat said, logistics investments in China are hard work on
a number of fronts and tend to be the preserve of larger
institutional players. One Singapore-based REIT manager
suggested that the difficulties of trying to build a China-based
platform were such that he preferred to invest in Australia,
where investors benefit from freehold property rights, longer
leases, and less government interference, among other things.
Japan is another market dominated by the major logistics
players. Although many new assets have already been created, opportunity still exists. According to one institutional
investor currently looking at the Japanese market: “Despite
being a developed nation, the existing facilities are not fully
automated or modern, so there’s a transition that’s ongoing.
And Japan is still undervalued. Especially if you’re willing totake some development risk, it’s probably the least risky placein the world because there are guaranteed minimum pricecontracts. So, your yield-on-cost is probably 6 percent to 7
percent, versus buying a logistics asset at 4 percent. If you
then sell at 4 percent, it’s still a good value-add type of investment. A lot of people are ahead of us in this game, though.”
According to Deutsche Asset Management, total returns forthe three main Asia Pacific logistics markets were 8.7 percent
and 8.4 percent for Shanghai and Beijing respectively, 8.3
percent and 7.9 percent for Melbourne and Sydney respectively, and 5.7 percent for Tokyo.
Another interesting destination for logistics, though it did notfeature prominently in our survey, is India, where the introduction of a new tax structure in place of the older dysfunctional
system has removed inefficiencies and opened up thelogistics sector to be developed across the country. This has
unleashed a torrent of incoming investment. According to one
locally based consultant: “In the last six months, we have seen
almost two-and-a-half-plus billion dollars of foreign money
flowing to the Indian warehousing and industrial real estatedevelopment story, with more coming. And that’s just fromthe top five or six names.” With domestic warehousing stockin India currently equivalent to around 1.5 percent of what isavailable in China, and cap rates currently in the area of 9 toTransactions throughout the region remained reasonably strong
in the first half of 2017, led by Hong Kong, which claimed five
major transactions totaling some US$1.6 billion. Activity was
driven mainly by domestic buyers. Australia was also a standout in terms of hotel transactions during the first half.
Probably the main trend influencing overall activity in Asia’s
hotel sector is demographic change, with huge annual
increases in new tourists traveling internationally as moreworkers rise above hand-to-mouth existences. This shift isbeing led mainly by China. The resulting opportunities arebeing pursued by private equity capital both big and small.
In particular, family funds tend to be drawn to the boutique hotel end of the sector, particularly in Southeast Asia.
According to a manager at one such fund: “In our hotels, theguest profiles have changed. In the past, we were looking forcorporate clients who paid group rates; but going forward,
Exhibit 3-9 Hotel Assets Buy/Hold/Sell Recommendationsfor 2018, by City
Buy

Hold

Sell

% of total

Ho Chi Minh City 57

40

Auckland 44

3

46

10
15

Tokyo 38

47

Bangkok 37

48

15

Osaka 35

55

10

Sydney 35

52

13

Jakarta 33

53

14

Melbourne 32

59

9Mumbai 30

59

11

Manila 28

57

15

Singapore 28

59

13

Bangalore 23

55

22

Shenzhen 22

61

17

Hong Kong 21

60

19

Shanghai 21

67

12

Kuala Lumpur 20

56

24

New Delhi 1972

9Taipei 18

71

11

Guangzhou 17

56

27

Seoul 1768

15

Beijing 15

62

23

China – second-tier cities 9

54

37

0%

20%

40%

60%

80%

100%

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

Emerging Trends in Real Estate® Asia Pacific 201853

banks have been under pressure and corporate accounts
have been cut. At the same time, though, we are also seeing
big growth in the leisure sector. So that guy in our lobby wearing a T-shirt is probably paying more than the guy in the suit.”
Another fund manager said: “Very wealthy people are traveling, but also vast numbers of first-time travelers [who] aremuch more interested in the two- and three-star market. They
want something clean, safe, and reliable, but they want tospend most of their money on the travel experience and not
the hotel. So, we’re bullish on the two- and three-star market
in major destinations such as Japan, China itself, Singapore,and Hong Kong.” Australia also was repeatedly mentioned as
being able to capture the outbound Chinese demographic.
Expected best bets: While Ho Chi Minh City again wins
the plaudits in our rankings, the tiny amount invested in the
hotel sector throughout all of Vietnam in the first half of 2017
(i.e., around US$20 million, according to CBRE) is perhaps
the best indicator of the real size of the opportunity available
there (although admittedly the nearly US$250 million invested
in 2016 paints a rosier picture). Foreign investor interest has
been strong, and yields are generally high.
Of the major markets, Australia—and in particular Sydney—continue to draw new investment. According to one investor:“Australia has a good weight of demand—occupancies arein the mid- to high-80 percent range. So demand is actually
getting constrained and yet there hasn’t been a new hotel built
in the financial precinct for 20 years. Values are now above
replacement cost and we see an opportunity to develop.”

54

Emerging Trends in Real Estate® Asia Pacific 2018

Finally, Japan has seen a surge in Chinese tourist arrivals overthe last few years, with inbound arrivals rising an impressive annualized 17.3 percent in the year through May 2017,
according to government figures. Though Tokyo has been
the main destination in the past, Osaka is now also growing
in popularity, as are ski resort areas in Hokkaido. According
to one locally based investor: “We are looking at some resort
residences around skiing areas up north, because there’s
strong demand for resort-type stuff in Niseko coming in fromforeigners, especially from other parts of Asia.”
The incoming Chinese demographic has driven a significant
and ongoing rise in Japanese room rates and revenue peravailable room (RevPAR) in all these locations. At the sametime, there is now a significant pipeline of new supply in theworks (at least partly to cater to demand from the upcoming2020 Summer Olympics in Tokyo). While that causes someconcern given how quickly Chinese tourists’ tastes are prone
to change, so far there is no sense arrivals are set to decline.

K. KOPTER

Chapter 3: Markets and Sectors to Watch

Set against an urban landscape of concrete, steel, and glass in Tanjong Pagar, Singapore’s central business
district, Oasia Hotel Downtown stands out with its distinctive siren-red silhouette cladded in lush greenery. An
integrated hotel/office development comprising a 27-story, 314-room business hotel and 100 new-age offices,
Oasia Hotel Downtown is one of the winners of the 2017–2018 ULI Global Awards for Excellence.

Emerging Trends in Real Estate® Asia Pacific 201855

Interviewees
AD Investment Management Co., Ltd.
Kenji Kousaka

CBRE Global Investors Japan K.K.
Tetsuya Fujita

Ingenia Communities
Simon Owen

AEW Capital Management
David Schaefer

CBRE Research
Brent McGregor

Ale Property Group
Andrew Wilkinson

Charter Hall
Sean McMahon

Invesco Global Real Estate Asia PacificInc., Japan Branch
Ryukichi Nakata

Allianz Real Estate
Rushabh Desai

Chongbang Group
Henry ChengAMP Capital
Tim Nation

Clover Advisors Company
Takeshi Endo

Angelo, Gordon International LLC
Jon Tanaka

Colliers International
John Kenny

Aoyama Realty Advisors Inc.
Haruyuki Shinya

CRE REIT Advisers, Inc.
Tsuyoshi Ito

Ascendas-Singbridge
Jonathan Yap

Daiwa House Industry Co., Ltd.
Tetsuo Suzuki

Asia Pacific Land Ltd.
Simon McDonald

Daiwa Real Estate Asset Management
Co. Ltd.
Akira Yamanouchi

Asterisk Realty & Placement Agency
Yukihiko Ito

Japan REIT Advisors Co., Ltd.
Ikuo Yoshida
JLL
Richard Fennell
Megan Walters
JPMorgan Asset Management (Japan)
Ltd.
Tetsuya Karasawa
Kenedix
Taisuke Miyajima
Takahiro Uchida
Keppel Capital
Christina Tan

Deutsche Bank
Geoff Crum

Knight Frank
Alan Liu

Dexus
Ross Du Vernet

LaSalle Investment Management
Ian Mackie

Diamond Realty Management Inc.
Takashi Tsuji

Lendlease
Tarun Gupta

Bank of America
Ben Boyd

ES-CON JAPAN Ltd.
Takatoshi Ito

Mapletree Investments Japan K.K.
Norihiro Matsushita

Bestland Co. Ltd.
Shigeaki Shigemasa

Farpoint
Dougie Crichton

Marubeni Asset Management Co. Ltd.
Tetsuo Saida

BlackRock Investments
Hamish MacDonald

Fife Capital
Allan Fife

MirvacSusan MacDonald

BlackRock Japan Co. Ltd.
Chris Handte

Fortress Investment Group
Akio Yamashita

Mitsubishi Corp.–UBS Realty Inc.
Toru Tsuji

Blackstone
Chris Tynan

Fukuoka Realty Co., Ltd.
Etsuo Matsuyuki

Mitsubishi Estate Co. Ltd.
Tetsuji Arimori

B-Lot Company Ltd.
Makoto Miyauchi

GenReal Property Advisers
Ankur Srivastava

Brookfield
Dev Santani

Goldman Sachs Asset Management
Co., Ltd.
Katsuhiro Ishikawa

Mitsubishi Jisho Investment
Advisors, Inc.
Masaki Sakagawa

AXA Real Estate Investment Managers
Frank Khoo
AXA Real Estate Investment Managers
Japan KK
Yoshihiko Hayafuji

Brookfield Asset Management
Niel Thassim

56

Japan Post Bank Co., Ltd.
Hiroyuki Tanaka

Brookfield Property Group
Stuart Mercier

The GPT Group
Matthew Faddy
Nick Harris
Bob Johnston

Cache Logistics Trust
Daniel Cerf

GreenOak Investment Management K.K.
Dan Klebes

Capbridge Investors K.K.
Kenneth Fridley

Hulic Co. Ltd.
Yoshito Nishikawa

CBRE
Henry Chin

Ichigo Investment Advisors Co. Ltd.
Wataru Orii

CBRE Global Investors
Richard Price

IDERA Capital Management
Harumi Kadono
Ryota Nagao

Emerging Trends in Real Estate® Asia Pacific 2018

Mitsui Fudosan Investment Advisors, Inc.
Motomitsu Morimoto
Shuji Tomikawa
Mori Building Co. Ltd.
Hiroo Mori
PAG Investment Management Ltd.
Naoya Nakata
Pamfleet
Andrew Moore
PAYCE
Brian Bailison
PGIM Real Estate
Benett Theseira

Pontiac Land Group
Kwee Wei-Lin

Roundtable Participants

Professional Property Services Ltd.
Nicholas Brooke

ANREV
Alan Dalgleish

Property Council of Australia
Ken Morrison

Blackstone Group
Florian Schaefer

Propertylink
Stuart Dawes

CBRE
Henry Chin

Quraz
Stephen Spohn

Grosvenor
Tim Jowett

Savills China
James Macdonald

Heitman
Skip Schwartz

SC Capital Partners
Andrew Heithersay

HOK
Josh Schroeder

Sekisui House REIT
Junichi Inoue

LaSalle Investment Management
Tom Miller

Shanghai University of Finance andEconomics
Chen Jie

Link Asset Management Limited
Nicholas Charles Allen

Shimao Property Holdings Ltd.
Feng Ke
Shopping Centres Australia
Anthony Mellowes
Soilbuild REIT Management Pte. Ltd.
(REIT Manager of Soilbuild BusinessSpace REIT)
Roy Teo Seng Wah
Standard Chartered Bank
Brian Chinappi

PwC
Paul Walters
Standard Chartered Bank
Brian ChinappiThomas Liu
UDP International
Sujata Govada
Urban Land InstituteTiffany Lau
Ariel Shtarkman

Starr International Investment Advisors(Asia)
Alison Cooke
Takara Leben Co. Ltd.
Yoshitaka Tejima
Third Shift Enterprises
Jane Lloyd
Tokio Marine Asset Management Co. Ltd.
Shinji Kawano
Tokyu Land Capital Management Inc.
Yutaro Tanaka
Touchstone Holdings Co. Ltd.
Masato (Fred) Uruma
Warburg Pincus
Joseph Gagnon

Emerging Trends in Real Estate® Asia Pacific 201857

Sponsoring Organizations
PwC real estate practice assists real estate investment advisers,
real estate investment trusts, public and private real estate investors, corporations, and real estate management funds in developing
real estate strategies; evaluating acquisitions and dispositions; andappraising and valuing real estate. Its global network of dedicatedreal estate professionals enables it to assemble for its clients themost qualified and appropriate team of specialists in the areas ofcapital markets, systems analysis and implementation, 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
Abhishek Goenka
India Real Estate Tax Leader
Bangalore, 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, South Korea
Chee Keong Yeow and Wee Hwee Teo
Singapore Real Estate Leader and Real Estate Tax Leader
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

58

Emerging Trends in Real Estate® Asia Pacific 2018

The Urban Land Institute is a global, member-driven organization
comprising more than 40,000 real estate and urban development professionals dedicated to advancing the Institute’s mission of providing
leadership in the responsible use of land and creating and sustaining
thriving communities worldwide.
ULI’s interdisciplinary membership represents all aspects of theindustry, including developers, property owners, investors, architects,
urban planners, public officials, real estate brokers, appraisers, attorneys, engineers, financiers, and academics. Established in 1936, theInstitute has a presence in the Americas, Europe, and Asia Pacificregions, with members in 76 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 urbanization, demographic
and population changes, new economic drivers, technology advancements, and environmental concerns.
Peer-to-peer learning is achieved through the knowledge shared bymembers at thousands of convenings each year that reinforce ULI’s
position as a global authority on land use and real estate. In 2016
alone, more than 1,700 events were held in 250 cities around the world.
Drawing on the work of its members, the Institute recognizes 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.
Patrick L. Phillips
Global Chief Executive Officer, Urban Land InstituteJohn Fitzgerald
Chief Executive, Asia Pacific, Urban Land Institutehttp://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
U.S.A.
202-624-7000
www.uli.org

Front cover photo: The Cutaway at Barangaroo Reserve, Sydney, Australia. The project
re-creates a historic headland on an abandoned dock in Sydney Harbor. A team led by
ULI J.C. Nichols Prize for Visionaries in Urban Development laureate Peter Walker
designed a focal open space including pedestrian and bicycle pathways, as well as thisunderground cultural center as part of the long-term vision for the area.

Image: Courtesy of Barangaroo Delivery Authority.

Emerging Trends in Real Estate®
Asia Pacific 2018
What are the best bets for investment and develop­
ment in 2018? Based on insights from a selectgroup of the most influential and experienced ULI
members, this forecast will give you a heads-up on
where to invest, which sectors and markets offer thebest prospects, and trends in the capital markets
that will affect real estate. A joint under­taking of
PwC and ULI, this 12th 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 and land use experts in the world. ULI
members lead the future of urban development andcreate thriving communities around the globe. Visit
uli.org/join to learn more about member benefits
and become a part of the ULI network today.

Highlightsn Tells you what to expect and what the best

opportunities are.
n Elaborates on trends in the capital markets,

including sources and flows of equity and debt
capital.
n Indicates which property sectors offer opportunities

and which ones to avoid.
n Provides rankings and assessments of a variety of

specialty property types.
n Reports on how the economy and concerns about

credit issues are affecting real estate.
n Describes the impact of social and geopoliticaltrends on real estate.
n Explains how locational preferences are changing.

U.S. $49.95
I S B N 978-0-87420-415-5

9

54995

780874 204155

www.uli.org

www.pwc.com