Asia Pacific, led by China and India, is projected to account for nearly half of the world’s economic output by 2030. That’s an impressive figure. But, the bigger news for real estate investors is this: by that same year, more than 50% of the world’s urban population growth — and almost all of the world’s top 50 cities — will have emerged in the Asia Pacific region.
This means that opportunities for investment will abound in the region. But, Asia Pacific is not monolithic: there is a vast diversity in geography, culture and economics, which investors must navigate expertly to achieve broad diversification and attractive risk-adjusted returns.
We all know that global mega-trends — urbanization, rising middle classes, aging populations, technology and the shift of economic power from the West to the East — will have a major impact on the built environment and the demand for real estate. No doubt, short-term performance of real estate will continue to be driven by economic cycles, but investors looking for long-term value growth will be keeping their focus on structural drivers of demand to discern the nuances that will drive success.
Every city has its own DNA, which provides investors with investment choices and justification through economic-driven diversification.
Here are just a few examples of the variances among key cities:
- Investing in Hong Kong and Singapore is largely a bet on financial services growth. Hong Kong serves as a conduit for China’s relatively closed capital market, whereas Singapore is the banking hub for private banking and Southeast Asia.
- Beijing and Tokyo may appear dissimilar in outlook, but they both provide density dividends underpinned by strong business concentration.
- Key secondary cities often present investment prospects that can rival those of capital cities. For example, Melbourne is the sport ing and cultural capital of Australia, attracting tourists and international students with its blend of affordability and quality of life.
City View: Finding the right place and right grade
It’s true that Asia Pacific accounts for only about 17% of the total investable stock globally. But, we must note that this level of stock rose by 23% between 2010 and 2016, which accounted for an impressive 64% of the growth in global office stock during the period. What’s more, we believe that Asia Pacific will continue to be world’s biggest contributor to the expanding property universe in the years to come.
With such momentum at work, real estate investors in the region have a much wider array of assets from which to choose. However, structuring a global real estate portfolio through a robust strategic or tactical allocation requires an in-depth understanding of the specific opportunities in each segment of each market.
In Tokyo, for example, the level of Grade-B office stock accounts for about three-quarters of the investable universe. This concentration stems from Japan’s early development of an industry-driven economy and the highly diversified nature and scale of the city. This explains why modern, high Grade-B Tokyo offices form a substantial proportion of a typical global or domestic institutional real estate portfolio. Investors are attracted to the liquidity, investability and smaller scale of these assets.
What about the availability of Grade-A stock in Tokyo? Market-watchers are attuned to many large-scale office projects in the development pipeline in the Toranomon and Shinagawa districts, which promise to raise the percentage of Grade-A office stock in those markets in the coming years. However, many of these developments will be held privately in developers’ balance sheets, which will dampen the potential rise in available Grade-A investment stock. This is why local market knowledge is critically important for investors.
“Many Tokyo developments will be held privately in developers’ balance sheets, which will dampen the potential rise in available Grade-A investment stock. This is why local market knowledge is critically important.
Two other mature core cities, Singapore and Seoul, share Tokyo’s real estate market dynamics: The Grade-B investment universe ratio stands at about 70% for Singapore and 60% for Seoul.
By contrast, key emerging office markets — particularly Shanghai, Beijing and Melbourne — have been rapidly developing new, large-scale buildings that offer global institutional investors greater opportunities to actively deploy capital into the Grade-A space. In Shanghai (and, to a lesser extent, Beijing), local developers often sell newly built local office stock into the market to recycle cash flows, particularly in China’s more decentralized districts.
Such is not the case in Hong Kong, however, where central Grade-A office assets are held closely by the developers. Regardless of the price cycle, the investment ticket size in cities such as Hong Kong and Seoul tends to be much bigger than in the Australian cities (Grade-A) and Tokyo (Grade-B).
No two cities are alike
The rapid expansion of the investable market across Asia Pacific will provide global investors with a wider pool of options than ever before. However, investors will need to carefully consider the depth of each specific market — liquidity and the typical size of transactions — to make the most meaningful capital allocation to pursue the best risk-adjusted returns.
A city-by-city analysis of key trends will yield a stronger investment strategy that can harness the breathtaking growth we’ll see in the region in the coming decades.
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