RE-entry strategies for real estate investors in Asia Pacific

5 strategic plays to reposition your portfolio

May 21, 2020

What strategies are emerging for the next normal?

The resumption of economic activity is underway across Asia Pacific and conversations within corporate and real estate circles have pivoted towards re-entry. Deployment of capital will only follow the re-entry of people into the economy and workplaces, which is expected to return more consistently in the second half of 2020. How should investors respond? Are we seeing an acceleration of trends that had appeared pre-COVID-19? What opportunities will emerge from dislocation and distress?

Investors are watching signs of green shoots appearing across Asia Pacific, country-by-country, and sector-by-sector, with great interest. In the past few weeks, we have seen evidence that real estate transactions are only just starting to progress. Looking deeper, we’ve seen individual asset sales put on hold in February and March that have now recommenced. Our conversations with investors indicate that servicing existing portfolios is still the priority before they commit to new capital deployments. With incomes falling from certain asset classes, many investors are focussed on asset management. Despite record dry powder of approximately US$40bn, the majority of investors are willing to remain patient and want to see a material discount on pre-COVID pricing to compel them to transact at the current time. We expect to see some dislocation, but so far there have been few signs of distress in the region – many owners are well capitalised with medium to long term horizons.

COVID-19 is accelerating trends that were already at play – for instance, technology and demographic shifts driving e-commerce traffic.

From where we stand today, investors are likely to reposition their portfolios with the following strategic plays in mind:

1.  Increased diversification – The speed at which market sentiment changed, was by definition, a black swan event and taught investors that the best defence lies in diversification – both geographic and sectoral. We think investors will be more likely to diversify their real estate holdings for risk mitigation purposes. This shift will involve consideration of risk/return metrics for investing outside their area of immediate expertise.

2.  More localised strategies - Investors are increasingly looking at funds and JVs to localise strategies. Given widespread travel restrictions and the inability to assess new markets, capital sources are reengaging with investment managers with on-the-ground experience and funds with local track record to assist geographic expansion strategies in Singapore, Sydney and Osaka.

3.  Going defensive - Defensive assets will become a higher priority as reopening intensifies regionally. Logistics, education, multi-family, build to rent, and data centres have emerged as focus points for investors recently. Over US$6bn in capital has been committed to logistics and data centre JVs over the past 60 days. We believe this is a sign of activity to come.

4.  Sustainability and technology shifts – Investors will mirror re-entry plans for corporates by focusing on better quality assets with health and safety attributes. More sustainable assets and better-managed cities with more energetic growth drivers will also prove attractive. For example, Tokyo is the most innovative city in Asia Pacific, as ranked by JLL, and will attract broad investor interest. Significantly, Alibaba just planted its roots in Singapore by acquiring an asset which gives optionality for owner-occupation. There are divergent views on how tenant demand will shift in the near-term, however it is likely that co-working as a trend will continue and the tech sector will continue to dominate demand for office space.

5.  Enhanced margin of safety: Conversations around the future of the office have reached a fever pitch recently. It is still too early to predict whether we will need more office space per 100 employees over the next 5-10 years, but there are specific aspects investors should consider when viewing offices through a long-term lens. A wide margin of safety can be achieved by focussing on cities with low vacancy rates and low upcoming supply such as Singapore, and Osaka.

A dislocation, like we’re currently experiencing, calls for tactical strategies. In the second half and beyond, we expect more sale and leaseback transactions to occur. Corporations worldwide are facing liquidity constraints and will seek to dispose of their tightly held real estate assets, to free up cash for operational needs. On the flip side, the stable income provided through sale and leaseback structures will appeal to investors wanting to lock in the defensive yield. The market is also primed for more creative solutions. Investors are eyeing privatisations and convertible debt structures that will help unlock assets from financially stretched corporates. 

The global economy is still in the early days of a long-term recovery. Re-entry will not be uniform, and each market will move at its own pace in terms of reopening their economies and revitalizing real estate through the return of the workforce. Real estate investors are patient and long-term by nature, but they are also fundamental to the broader recovery. Encouragingly, they have started to show signs of returning confidently to this market.

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