Investing in real estate via a mix of public and private routes will be more effective in offsetting the wide range of market risks.
Such a diversified approach can help tackle the challenges of rising interest rates, ongoing property market adjustments and softer fundraising conditions, CBRE recommended in a new report.
More specifically, a multi-pronged framework – using public equity, private equity, public debt and private debt – creates investment options for real estate exposure that offer varied liquidity, control and potential risk-adjusted returns, said the firm.
For example, Asia Pacific has seen strong growth in private real estate funds, with closed-ended vehicle assets up 11% over the past decade to US$65.6bn awaiting deployment, largely from opportunistic mandates.
More recently, however, private equity fundraising momentum for commercial real estate (CRE) in the region has slowed. In the first six months of 2023, it amounted to US$10.9bn, 21% lower than the same period a year earlier.
Meanwhile, public real estate presents opportunities, with 309 REITs capitalised at US$376.5bn across the region.
“In the current environment, institutional investors can increase strategic allocation to public equities and debt,” said Henry Chin, global head of investor thought leadership and head of research for Asia Pacific at CBRE.
Weighing up entry points
CBRE believes investors can opportunistically capture value between public and private markets, particularly in Australia. Yet the window of opportunity will be short, noted the report.
For core investments, CBRE sees value in active REITs backed by stabilised assets, such as J-REITs deploying capital into the office and multi-family sectors.
Investors should also consider the Singaporean and Hong Kong REIT markets for dividend returns, and Australia and Japan for total returns.
“Many REITs are now trading at a discount, presenting attractive entry points,” explained Chin. “Overall dividend yields for listed CRE vehicles are now rising in most Asia Pacific markets.”
At the same time, equity funds may also take REITs private as private market adjustments have been less pronounced, he added.
On the private equity side, CBRE said investments in markets with potential distressed opportunities will have a greater chance of succeeding in the current environment.
For core opportunities, the firm suggests investors look for stable returns in the short-to-medium term, particularly prime logistics assets in low vacancy markets and also data centres in developed markets.
In the value-added space, hotels and underperforming office assets in markets with strong prospects for income growth will provide the most attractive opportunities, along with older multi-family developments in Japan, build-to-rent in Australia and brownfield logistics.
Debt potential
Investors should also consider public and private debt as ways to access CRE in Asia Pacific.
CBRE estimates a US$5.1bn debt funding gap in the sector by 2025, with offices facing the largest shortfall.
However, while public bond issuance in Asia Pacific remains strong, it is still dominated by mainland Chinese state-owned developers, creating risks as the chance of onshore mainland Chinese bond defaults mount following a wave of offshore defaults.
Opportunistic investors are awaiting a rebound in mainland Chinese property bonds as government support kicks in, but core investing should look for bonds backed by stabilised assets rather than development projects. “Assets with stable rental income and occupancy are better placed to provide sufficient cash flow to service debt,” said the CBRE report.
In terms of private debt, pricing has stabilised and the upcoming funding gap for CRE assets is driving demand for bridge and development loans.
“Attractive returns may be found through credit solutions in strong markets like Australia and Korea, as well as restructurings in the resistant Chinese residential sector,” said Greg Hyland, head of capital markets for Asia Pacific for CBRE.
