Is Asia the hottest ticket in real estate?

Investors are increasingly piling into real estate in Asia, where investment volumes this year have hit fresh record highs.

August 07, 2018

Asia Pacific real estate transaction volumes hit US$42 billion in the second quarter, up 26 percent from the same period in 2017, according to JLL’s latest Global Capital Flows research. First half volumes were at US$81 billion, up 29 percent from a year earlier, and the highest level on record.

The pace of deal-making in APAC has raced ahead of other world regions, which started their recovery from the previous cyclical downturn earlier. First half transaction volumes rose nine percent in both the Americas and Europe.

The boost from APAC has had an impact on global volumes, which in the first-half of 2018 rose 13 percent to US$341 billion. That total was 13 percent higher than 2017 and the best first-half performance since 2007.

Transaction volume growth in Asia Pacific is being driven by “a continued cyclical recovery in developed markets such as Australia and Japan alongside secular growth – from a low base – in developing markets,” says Pranav Sethuraman, from JLL’s global capital research team.

Nearly all Asia Pacific’s largest markets recorded positive investment growth in the first half, with Hong Kong, South Korea and Australia emerging as top performers with a combined average growth rate of 110 percent over 2017. And despite double-digit declines in the second quarter, overall activity was up by three percent and seven percent in China and Japan respectively due to their strong start to the year.

However, the biggest potential for growth comes from the more immature markets where a number of factors – such as lack of transparency – are playing a role in impeding investment, says Sethuraman. As these factors dissipate these markets will be significant growth drivers,

“Large markets which have very supportive demographics, such as India, Indonesia and China, support a compelling case for future growth in the region,” he says.

Many of Asia’s markets have a full house of positive factors for the long-term growth of real estate as an investment class. For example, India, Indonesia and Vietnam have populations of 1.3 billion, 261 million, and 93 million respectively and all have a growing middle class, rapid urbanisation, a youthful demographic and improving governance and real estate transparency.

Other Asian nations may lack a trump card or two: China has an ageing population while the Philippines suffers some political uncertainty for example, but most market fundamentals are positive for real estate.

Government policy is also favouring real estate: India’s Real Estate (Regulation and Development) Act, 2016 is improving transparency, while Chinese authorities are backing a huge push to develop multifamily rental housing.

Developed Asian markets, especially Australia, Hong Kong and Japan, have attracted significant cross-border capital from within and without the region and the cycle in each seems to have further to go. For example, JLL is predicting continued rental growth in the Sydney and Melbourne CBD office markets this year, even after rises of 26 percent and 13.4 percent in 2017.

The latest research from JLL shows the gap between the risk-free rate and prime real estate yields continuing to close. As investment has flowed into the global real estate sector, asset prices have gone up and prime office yields have compressed by 221 basis points from their peak in Q1 2009 to 4.69 percent in Q2 2018, their lowest point in the current cycle.

The flow of capital into the sector looks set to continue as target allocations to real estate in institutional portfolios rose above 10 percent for the first time in 2017, according to research from Cornell University and Hodes Weill & Associates. Allocations to real estate have risen 120 basis points since 2013 and are expected to increase by a further 20 basis points this year.

Despite modestly rising interest rates, JLL believes there is further room for yield compression for prime real estate as, throughout the current cycle, yields appear to be more dependent on market fundamentals rather than interest rates. With Asia Pacific’s positive fundamentals, it has the best prospects for performance and for attracting more investment.

Click to find out the top global investment headlines from Q2 2018.