Worldwide: Private Equity Real Estate In Asia: A Bright Spot In Uncertain Times

Last Updated: 5 November 2019
Article by Jocelyn Oh

Most Read Contributor in Netherlands, October 2019

The resilience of the Asia Pacific real estate market is evident in the way it continues to expand in the face of ongoing trade tensions and a slowing global economy.

While Asian real estate as an asset class has always attracted investors' attention, growing interest from regional and foreign institutional investors, along with the hunt for yield, have fuelled the growth of the Private Equity and Real Estate (PERE) sector at an exponential rate in the past five years.

The increased appetite for APAC real estate beyond assets in developed countries has enhanced market participation and boosted transaction volumes across the region. One survey shows that most investors expect annualised gains of 10% or more from regional property by the end of 2019, with developed and emerging markets in the region garnering interest.1

Strong fundamentals

Over the past decade, property prices have been on the rise across major Asian markets. Occupancy levels remain healthy, underlining the sector's strong fundamentals2 and, with borrowing rates trending down across Asia,3 investors continue to regard APAC property valuations as attractive.

The growing number of new funds considering APAC assets signal that prices remain at acceptable levels and the region's markets continue to offer a range of investment opportunities. Asia Pacific-focused private equity funds recorded an estimated USD37.8 billion in net inflows in the first nine months of 2018 compared to USD37.7 billion in 2017.4

Fundraising among pan-Asian PERE asset managers remained buoyant in the first quarter of 2019, especially in markets like China, Japan and South Korea, with demand driven by securities firms closing large deals. Intra-regional investments, led by Chinese developers looking to Singapore and Hong Kong to raise funds, helped boost cross-border investments, which rose nearly 9% year-on-year in Q1 to USD6.3 billion.5

Recent moves by international investors underline their confidence in the regional property sector. In 2019, a quarter of the nearly 300 PERE funds being currently launched are focused on APAC.6 Interest from global asset managers ranges from major markets, such as China and India; Japan and South Korea in North Asia; to Indonesia, Malaysia, Thailand and Philippines in Southeast Asia.7 Regulatory reforms in frontier markets are creating fresh investment opportunities that are helping to draw investor attention. Private equity giant KKR launched its first Asia-focused real estate fund in early 2019, estimated to raise USD1.5 billion from investors, including pension and sovereign funds.8

Japan, with its ultra-low interest rates, is especially appealing to foreign funds such as KKR, which plans to concentrate on office and residential real estate, as well as the real estate divisions of major companies in the Japanese market.9

New focus markets

Developed economies like Japan and South Korea offer attractive valuations in core segments, including office and healthcare properties. However, major emerging markets such as India and Indonesia are experiencing a boom in new economy industries, fostering new opportunities.

For instance, in Indonesia, Southeast Asia's largest economy, the exponential growth of online transport and logistics startups like Gojek10 has created a demand-supply gap for warehouses around the Jakarta metropolitan region. Industrial real estate across APAC pulled in capital flows to the tune of USD26 billion in 2018, a 24% jump over the previous year.11 Some estimates peg revenues from Indonesia's logistics and warehousing market alone to reach USD75 billion by 2023.12

India, one of the world's fastest-growing major economies,13 features a strong domestic market that is driving demand for data centres from the country's thriving technology sector. Co-working spaces, which are cropping up to serve a vibrant start-up sector,14 are a major growth segment across Asia, up 36% across the region in 2018.15

Across Asia, the ongoing drive for infrastructure development and projects such as China's Greater Bay Area initiative are fuelling demand and creating avenues for investments in segments ranging from office space and business parks, to logistics and hospitality.

Two sides of a coin

Opportunity and risk often go hand in hand in the current global business environment and it is no different when it comes to PERE investment. Macroeconomic factors and business trends play a big part in driving potential demand for real estate. The US-China trade war, for example, could slow China's real estate sector indirectly as the market adjusts to changes in trade policies.

The resulting shifts in supply chains over the long run – as manufacturers consider leaving China for other markets in Asia16 – could eventually reshape the industrial and logistics space across the region.

Market-specific challenges aside, changes in domestic policies pose a risk to investors in the near term. For example, in Australia, planned changes to the tax treatment of managed investment trusts may be a game-changer as they threaten to remove the significant rebate, which has so far supported demand by allowing certain investors to pay a concessional withholding tax of 15% instead of 30%.17 There are signs prices may have peaked. However, while valuations are high compared to historic levels, they are still reasonable in global terms18 – the country offers a stable political and economic climate that is perceived as low-risk.

In Japan, where the dual scenario of opportunity and risk is playing out, a demand-supply mismatch is dictating trends as domestic and international investors, faced with limited opportunities in Tokyo, are shifting focus to other markets, including Osaka.19

Political factors play a part in markets like India, where real estate investments by private equity players and non-banking financial institutions fell by nearly a third in the first half of 2019 due, mainly, to the uncertainty in the run-up to the general elections. A win for the pro-business government led by Narendra Modi has triggered expectations of a revival in the coming months.20

Call for cautious optimism

As more investors recognise Asia's real estate potential and with more markets opening up to foreign investments, players are treading carefully to avoid being left holding an asset should markets tumble.21 But low interest rates should keep funding costs down and demand firm.22 Accordingly, we can expect the growth and diversification of PERE in the region to continue.

Talk to us

TMF Group is an experienced administrator of capital market transactions and PERE investments, providing a complete range of fund and business services, including bespoke back office solutions tailored to meet our clients' needs.

As one of the largest managers of special purpose vehicles (SPVs) worldwide, our fund administration services help global asset managers operate their investment funds and corporate structures in different geographical locations. Our team based across APAC can help navigate the region's unique business environment, ensure full compliance with regulations and provide timely intelligence about local developments, all of which are crucial for building a successful business in the region's PERE space.

Contact us to understand more about our fund services and connect with our local experts.

Footnotes

1. https://www.pwc.com/sg/en/publications/assets/emerging-trends-real-estate-asia-pacific-2019.pdf

2. https://www.blackrock.com/institutions/en-axj/insights/global-real-assets-outlook

3. https://www.channelnewsasia.com/news/commentary/us-federal-reserve-interest-rates-cut-hike-how-much-impact-11769602

4. https://www.tmf-group.com/en/news-insights/articles/2019/may/asia-pacifics-pe-fundraising-market/

5. https://www.cbre.com/report-download?PUBID=D4C40988-099D-4467-8835-9B5AF4266B00

6. https://www.tmf-group.com/en/news-insights/articles/2019/may/asia-pacifics-pe-fundraising-market/

7. https://www.tmf-group.com/en/news-insights/articles/2019/may/asia-pacifics-pe-fundraising-market/

8. https://www.reuters.com/article/us-kkr-asia-fundraising-exclusive/exclusive-kkr-raising-first-asia-real-estate-fund-targeting-1-5-billion-sources-idUSKCN1R20O1

9. https://asia.nikkei.com/Business/Markets/Property/Global-funds-set-sights-on-Japan-property-market

10. https://www.techinasia.com/how-go-jek-became-unicorn

11. UBS Real Estate Outlook Asia Pacific – Edition 2019

12. https://www.prnewswire.com/news-releases/indonesia-logistics-and-warehousing-market-is-expected-to-reach-usd-74-9-billion-in-terms-of-revenues-by-the-year-2023-ken-research-300815461.html

13. https://www.bbc.com/news/business-48478028

14. https://www.financialexpress.com/money/what-is-driving-the-growth-of-co-working-space-in-india/1506720/

15. https://www.mingtiandi.com/real-estate/flexible-office/asia-leads-the-world-with-36-growth-in-co-working-supply/

16. https://www.forbes.com/sites/kenrapoza/2019/07/16/europe-joins-us-companies-moving-out-of-china/#53a5dcd515bf

17. https://www.nortonrosefulbright.com/en/knowledge/publications/9ffecda7/significant-changes-to-the-taxation-of-stapled-structures-for-infrastructure-investment

18. https://www.cbre.com.au/research-reports/Australia-Real-Estate-Market-Outlook-2019

19. http://pdf.savills.asia/asia-pacific-research/japan-research/japan-investment/jp-osaka-spotlight-05-2019.pdf

20. https://mumbaimirror.indiatimes.com/mumbai/other/private-equity-investment-in-real-estate-crashes-31/articleshow/70473986.cms

21. https://www.imf.org/en/Publications/REO/APAC/Issues/2018/04/16/areo0509

22. https://www.colliers.com/-/media/files/apac/asia/colliers-asia-2019-outlook-1.pdf

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