Asians to invest more in properties beyond the region than in it

Singapore - REAL estate markets in Asia will likely remain less appealing than those in the US and Europe this year, with Asia plagued by anaemic economic growth and waning rents and capital values amid a supply deluge.

In a recent interview with The Business Times, CBRE head of global research Nick Axford flagged that there will be greater outbound capital flow from the region this year by Asian real estate investors, who snapped up some US$39.7 billion (S$55.3 billion) of properties outside the region last year, a 26.8 per cent jump from 2014.

He said: "If you look at parts of Europe and North America, there is strong economic growth, recovering demand, rising rents and not much developments. In many Asian markets like Singapore and Hong Kong, it is almost the opposite - strong pricing, but weakening economic growth and demand.

"The balance of attractiveness has shifted towards Europe and North America."

Asian investors invested US$14.3 billion in real estate within the region last year, a 12.3 per cent rise from 2014, going by CBRE's preliminary estimates covering office, retail, industrial, hotel and mixed-use projects; the figures exclude residential projects and development sites.

Rising interest rates will generally fuel upward pressures on capitalisation rates - the ratio of a property's net operating income to its market value. With the spread between interest rates and property yields near historical highs in many markets in Europe, Dr Axford noted that it is possible that rising interest rates will be "absorbed" in the normalisation of spreads.

Sovereign wealth funds (SWFs) in the region such as Singapore's GIC have trained their eyes on Europe and North America as they re-balance their portfolios. CBRE estimates that some US$8.1 billion was invested outside the region by Singapore-based investors, compared to the US$6.6 billion they ploughed into properties within the region.

Based on preliminary data from real estate data and analytics firm Real Capital Analytics (RCA) as at Jan 12, Singapore-based investors purchased a record US$26.3 billion in overseas real estate in 2015, up 49 per cent from US$17.6 billion in 2014.

These outbound Singaporean investments were driven by big-ticket purchases by heavyweights such as GIC and Global Logistic Properties (GLP), Temasek Holdings, Mapletree, ARA Asset Management Group and Ascendas Real Estate Investment Trust.

RCA's database covers transactions above US$10 million in asset classes such as development sites, office, industrial, retail, apartment, hotel and serviced apartments.

Dr Axford said that while rental declines are seen across all property segments in Singapore, investors can make opportunistic buys with a time horizon of five to 10 years.

In Hong Kong, the retail and logistics segments have softened; the office sector is holding up. Last year, Hong Kong Central Business District office rents rose 14 per cent, with prime office rents hovering at levels more than double those in Singapore.

Dr Axford said: "There is still demand from the Chinese in good-quality office space in central Hong Kong. We are expecting rental growth of 5 to 10 per cent for Hong Kong office this year."

He views the recent volatility in the Chinese stock markets as an over-reaction to negative news from China - even though there has been no significant change to its economic outlook over the past six months.

But with the probability of further weakening of the renminbi against the greenback, there will be sustained interest from Chinese investors wanting to put their capital to work outside China, in European and North American real estate, he added.

Capital outflow from China was evident last year. CBRE's estimates indicate that real-estate investments outside Asia by Chinese investors jumped 35.9 per cent to US$13.1 billion, against a 7.5 per cent drop to US$9 billion which they sank into domestic real estate.

lynkhoo@sph.com.sg

This article was first published on February 12, 2016.
Get The Business Times for more stories.