INVESTMENT DECLINES BUT INCREASE IN ASSET AVAILABILITY LIKELY TO SUPPORT ACTIVITY IN H2 2020
Since the onset of the pandemic, commercial real estate investors in Asia Pacific have adopted a more cautious attitude towards underwriting and are requesting larger discounts to compensate for weaker fundamentals. While sellers have lowered asking prices, reductions are well above buyer expectations. Combined with the continued imposition of travel restrictions, which have inhibited cross-border deals, these trends pulled down investment turnover by 36% y-o-y in H1 2020.
A recent uptick in confirmed COVID-19 cases in several markets, combined with ongoing geopolitical tension, will inhibit investment momentum in the coming months. CBRE expects investment turnover to fall by 25% to 35% in 2020.
However, liquidity remains strong, with real estate funds and institutional investors possessing a considerable volume of dry powder. Investment sentiment is improving along with the resumption of business activity. The major factors hindering investment turnover are the price gap and a lack of attractively priced investable assets.
With the prolonged pandemic set to further impact corporate earnings, more companies will consider adopting an asset light strategy, which may involve selling properties to raise capital. CBRE has already observed several firms engaging in sale and leaseback deals to replenish working capital. Asset availability will also be enhanced by potential asset disposals by highly leveraged developers; a wave of fund expirations by closed-end real estate funds commencing in 2021; and redemption pressure among open-ended funds, especially in Australia.
The pandemic has underlined the importance of assembling resilient portfolios – a trend that will see investors adjust their weighting towards structural and defensive plays. Recent examples include institutional investors forming partnerships with logistics developers or committing capital to logistics funds.
FIGURE 6: ASIA PACIFIC TOTAL INVESTMENT VOLUME
Remarks: Transaction volume includes office, retail, industrial, hotel, mixed-use and other commercial properties. Residential and development site are excluded.
Source: CBRE Research, August 2020.
Although yield expansion has been observed for office and retail assets in major cities, movement has been limited compared to that witnessed during the Global Financial Crisis. Logistics yields have been largely stable.
Investment strategy in the coming quarters will be guided by fundamentals such as tenant quality, with investors advised to stay attuned to shifts in occupier trends when sourcing investment opportunities. Business parks are likely to emerge as a key focus amid generally robust levels of demand from tech and life sciences companies.
Although NAV discounts have narrowed since mid-March following the stock market rebound, investors can still pursue public to private opportunities on a case by case basis. With lenders remaining highly selective, real estate debt remains an opportunity for investors willing to provide financing, especially for retail, hotel, property development and assets with high vacancy risk.
The pandemic has triggered a second wave of structural change in the logistics sector, with cold storage, last-mile facilities, the re-development of outdated warehouses and greenfield development all attracting a considerable volume of capital. While data centres are now firmly established as a mainstream investment class among developers and institutional investors, operational risk and securing planning approvals remain a challenge.