Real estate investors are shunning Asia Pacific in anticipation of a North American and European real estate correction, waiting to allocate more capital to those re-priced assets.
This is according to a report from Goodwin, KPMG and IQ-EQ Fund Services, which surveyed senior professionals in the Apac private equity real estate industry.
Apac economies are set to deliver stronger economic growth than their European and US counterparts over the next decade, which typically bodes well for real estate investments in those markets.
However, the report found that despite “very obvious” engines of economic growth in most Apac jurisdictions, global investors are under-allocated to the region.
It is precisely because of the resilience of developed markets in Apac relative to Europe and North America, that real estate professionals are seeing relatively lower levels of capital allocated to them.
One respondent in the report said: “Europe and North America represent the biggest capital sources but are also the markets that are expected to be the first to see widespread repricing, and so those investors may see more value closer to home.”
China is too big to ignore
The Chinese real estate market was the obvious exception to this trend given its recent market upheaval. The sector is still reeling from a downturn that has seen some of its largest property developers fall into crisis.
The report found that among funds seeking to raise money, many said they were “under pressure to reduce allocation to China”.
For funds already invested, there has been pressure from some Limited Partners (LPs) to scale down allocation to China, but most General Partners (GPs) “are seeking to resist that”.
Due to the sheer size of China’s real estate market, many respondents found that it was “too big to ignore”, pointing to recent large Chinese transactions with major investors from the Middle East.
The Japanese darling
Japan was another outlier, except it has been a positive story for the region due to its lower relative interest rates and favourable prospects.
The report said that it was by far the “darling jurisdiction” among real estate professionals in Apac. This is largely due to the Bank of Japan being the only central bank keeping its interest rates at ultra-low levels.
Respondents to the survey said it was therefore “the only Asian market in which you can still underwrite an investment on a conventional basis.”
However, it isn’t just low interest rates that makes the country attractive to real estate investors, the respondents cited its stable economy and now weakened currency which offers “an FX kicker” for foreign investors.
They also pointed to the attractiveness of the Japanese hospitality sector, given the country’s position as the most popular destination for Asian tourists.
Due to Japan’s scale, liquidity and low rates, it remains a key market for the respondents. “If you have an Apac mandate, you can’t not invest in Japan,” one GP said in the report.