Asia Pacific real estate deals: More room to grow?

By Shirin Tang,
managing partner at Morrison & Foerster
/ EdgeProp Singapore |
December 17, 2021 4:46 PM SGT
A major contributor to deal flows in Asia Pacific over the last 12 to 18 months has been transactions involving industrial properties, which include assets such as logistics terminals, warehouses and manufacturing facilities (Photo: Bloomberg)
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SINGAPORE (EDGEPROP) - Despite persistent headwinds facing the real estate industry globally, Asia Pacific has continued to prove resilient. In the face of resurging Covid-19 cases and geopolitical uncertainty, private equity real estate (PERE) deals in the first nine months of the year totalled more than US$20 billion ($27.3 billion) in aggregate value, according to data from Preqin. Furthermore, looking at a wider universe of industry dealmakers, JLL found direct real estate transactions across the region touched US$125 billion — just 6% shy of pre-pandemic levels in 2019.

The fuel behind healthy deal activity

Both data-points highlight a strong desire to get deals done that we expect to carry over into next year. Fuelling this trend is a growing base of capital resources held by fund managers targeting the region that have benefitted from robust investor demand for diversification and attractive income-producing opportunities. The first half of 2021 saw US$8 billion raised by Asia Pacific-focused private real estate funds, a notable increase on the US$5.7 billion raised at the same time last year, according to data from Private Equity International (PEI).
Indeed, there has been no shortage of blockbuster fundraising this year. In October, Singapore-headquartered GLP, a leading global investment manager and business builder in logistics real estate, announced the establishment of the largest Japan-focused private real estate fund to date, GLP Japan Development Partners IV. The fund has raised JPY311 billion ($3.74 billion) with a stated final target of JPY412 billion in equity commitments. In the same month, Sydney-headquartered Macquarie Asset Management announced it had successfully raised AUD1.1 billion ($1.08 billion) in commitments for an Asia Pacific opportunistic real estate fund targeting investments in developed markets across the region.
While these are only a couple of recent examples, reports indicate that fundraising is poised to remain elevated. Asia Pacific-focused PERE funds were looking to secure a staggering US$37 billion in investor commitments at the end of October — a promising early indicator for future transaction volumes. As capital continues to flow into the region and deal competition intensifies, is there room for further transaction growth? We believe the answer is “yes”, for a few reasons.

Industrial property: Strong transaction interest remains

A major contributor to deal flows in Asia Pacific over the last 12 to 18 months has been transactions involving industrial properties, which include assets such as logistics terminals, warehouses and manufacturing facilities. More importantly, perhaps, is that much of the interest surrounding quality assets in this sub-sector is still very robust. We have witnessed this persistently strong interest first-hand. Transaction advisory requests from around the region involving industrial properties have increased considerably since the onset of the pandemic, with logistics and data centre assets in particular standing out.
Regional deal data supports these observations. Close to US$6.3 billion in industrial PERE deals alone have been completed in the first nine months of 2021, up almost 13% compared to the same period last year, according to Preqin data. For direct deals tracked by JLL, the picture is even more impressive, with logistics investments in the region over the past 12 months from October reaching US$43 billion, more than 1.7 times the US$25 billion recorded in all of 2019. Similarly, CBRE reported that data centres recorded US$1.8 billion in investment volumes across Asia Pacific for the six months to June 2021 — 80% of the total seen in all of 2020.
The sustained appeal of industrial assets like these is understandable, considering the uncertainty present in today’s low-yield environment. Put simply, industrial properties serve a key role in our global economic infrastructure, presenting investors with potentially unique defensive characteristics, attractive rental incomes, and capital appreciation that are becoming difficult to find in other asset classes. Coupling this with Asia Pacific’s world-beating economic growth rate, expanding consumer class, rising need for digital infrastructure and booming e-commerce industry, the long-term investment case for industrial real estate is undeniable.
While promising for the real estate asset class more generally, strong interest in regional deal flow is also presenting challenges for those leading transaction activities. Going forward, mitigating the risks of tighter margins and rental yields in “hot sectors” like logistics and data centres will be top of mind.

Unlocking value in a competitive deal environment

With upward pressure on valuations growing and some asset prices moving into frothy territory, the region’s secular tailwinds are not enough on their own to entice savvy asset-owners to continue transacting. In response, dealmakers are getting more creative with their investment approaches, with a renewed focus on value creation.
We have witnessed three important trends in our recent conversations with industry participants that have the potential to further support high-quality deal activity in the short term and enhance performance over the long term.
First, experienced fund managers are showing greater willingness and capacity to look further afield for attractive opportunities. Emerging economies in Southeast Asia like Vietnam and Indonesia, for example, are increasingly on the radar of deal teams. In addition, expanding consumer demand coming from Tier 2 and Tier 3 cities — those outside of established major metropolitan areas — are drawing greater interest. For others, the search for new targets has gone beyond even physical location to explore niche assets like specialised life sciences facilities that may have previously fallen outside of their traditional remit.
Second, deal structures are becoming more dynamic and complex. There is a plethora of options available to asset owners and investors attempting to get in on the action at attractive entry points. Direct investments and co-investments have continued to grow in popularity among investors in recent years, as has the appeal of build-to-suit and greenfield developments in the case of industrial assets. We have also seen increasing interest in investments in managers and operators — for investors, these represent an opportunity to secure valuable access to an investment pipeline; for experienced asset managers, such partnerships with local operators represent an opportunity to venture into a new region.
Lastly, digital technologies are playing a bigger role, opening new doors for asset owners to deliver value across their portfolios in ways not previously possible. The adoption of property technologies spanning innovative applications of artificial intelligence, the Internet of Things, big data, and much more, is empowering decision-making capabilities and facilitating more efficient and sustainable use of space, producing tangible benefits including lower operational costs, enhanced tenant satisfaction and more attractive financing options. Operators that embrace these technologies have a noteworthy competitive advantage.

Opportunities abound across the risk-reward spectrum

Taken all together, the outlook for real estate investment continues to be particularly bright for Asia Pacific. We expect deal activity to maintain its strong momentum well into 2022, supported by healthy fundraising activity over the next year and broad investor interest in the region. A deep pipeline of existing assets and development needs across fast-growth geographies like Southeast Asia, India and China will ensure that the Asia Pacific remains particularly well suited for further capital deployment and cross-border investment opportunities well into the next few years.
Further, while residential and industrial assets (“beds and sheds”) will likely remain high on the target lists of dealmakers in the region, we have seen recovering interest in Grade-A office acquisitions and select retail property assets in safe-haven locations this year, including Australia, Japan, South Korea and Singapore. Well-established gateway cities in these locations could see more interest from investors in the coming year, as asset owners search for relative economic stability and attractive rental fundamentals amid continuing global geopolitical and Covid-19 uncertainty. In fact, a recent survey this year of real estate industry leaders by PwC found that, in order of ranking, Tokyo, Singapore, Sydney, Melbourne and Seoul took the top five regional spots for cities with the best investment prospects.
As economies continue to ease restrictions, stabilising occupancy levels and rental yields in major city centres should only strengthen these trends, adding further impetus to our positive perspective on real estate deal flow. With ample capital resources earmarked to be deployed in the region, real estate fund managers are well-positioned to take full advantage of emerging transactions across the entire risk-reward spectrum as the market dynamics play out. Going forward, however, establishing a clear value creation strategy for any asset will be key in this increasingly competitive and complex market.
Shirin Tang is the managing partner at Morrison & Foerster in Singapore (Credit: Morrison Foerster)

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