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Asia Pacific real estate providing attractive prospects
Real estate performance across much of the Asia Pacific region has been steadily attractive on the back of a strong capital market and healthy recovering leasing market. Japan, China, Hong Kong and Singapore experienced strong office leasing demand in the first half of 2015, while Australia and Korea witnessed short-term challenges due to a weakened economy. Recovery is expected in 2016 for key most markets while it is likely to remain subdued in Singapore due to a surge of new supply
Koichiro Obu 18 Sep 2015

 
   
Real estate performance across much of the Asia Pacific region has been steadily attractive on the back of a strong capital market and healthy recovering leasing market.
 
Japan, China, Hong Kong and Singapore experienced strong office leasing demand in the first half of 2015, while Australia and Korea witnessed short-term challenges due to a weakened economy. Recovery is expected in 2016 for key most markets while it is likely to remain subdued in Singapore due to a surge of new supply.
 
Focus on cash flow
 
Established markets in the mature economies of Australia, Japan, and South Korea provide some defensive traits. Deutsche Asset & Wealth Management (Deutsche AWM) anticipates that healthy economic fundamentals in 2015 could help support office markets in Melbourne, Sydney, Tokyo, Osaka and Seoul where combined returns are forecast to average 8-9% over the medium term, although accessibility to prime assets is challenging for institutional investors. The income component of logistics properties can provide attractive investment opportunities with a steady income stream and a higher yield – typically in excess of 5%.
 
Choose markets with mispricing and repositioning opportunities
 
Secondary locations in mature markets and China provide such plays. However, accessibility to product, competition from domestic capital, and limited exit opportunities make such openings a challenge. There may also be opportunities in core locations in mature North Asian markets by taking on leasing up risks for newly constructed but vacant office properties. Retail is a strong candidate for a value-add proposition including the improvement of foot traffic and a fresher tenant mix.
 
Real estate assets in emerging markets typically have less sophisticated asset management skills that fail to extract the true value of these properties. To complement the expansion of online retail, we have also witnessed the conversions of older industrial properties to distribution/logistics facilities. This is particularly true for the mature markets in Australia, Hong Kong and Singapore.
 
Develop in under-supplied markets
 
In many emerging markets, development provides a viable route to access the real estate market. This means taking on construction risk, including managing the construction process and the necessary permits from local authorities. For example, the lack of modern logistics facilities in China has attracted a growing number of players including Goodman (Australia) and Global Logistics Properties (Singapore).
 
Experienced logistics developers can increase supply of this property type to meet the very high specifications of tenants. Residential development is also another familiar opportunistic play although margins have since fallen in China. As consolidation in China’s property sector continues, the recapitalisation of some cash-starved developers could also provide an opportunity to enter the Chinese real estate market.
 
Select opportunities with caution
 
Bond-type prime assets have become scarce due to limited deal flow, difficulty in meeting cash yield requirements, and the expected negative impact from rising interest rates. While we still expect modest returns; caution should be taken when investing in the highly cyclical office markets of Hong Kong and Singapore due to near future rental corrections and the possibility of rising cap rates.
 
Currently these markets are dominated by end users and private investors with strata-title transactions often seen. We favour non-discretionary suburban retail as it provides a cushion against fluctuations in discretionary spending, although the negative impacts of online retailing cannot be fully discounted. Neighbourhood centres and suburban retail typically attract these types of tenants.
 
Koichiro (Ko) Obu is head of Research & Strategy, Asia Pacific, Alternatives & Real Assets at Deutsche Asset & Wealth Management (Deutsche AWM)
 

  

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