Key themes still important for APAC real estate investing

Our research team says to take a tactical approach to property investing in a cyclical world. What are some actionable strategies for the next five years?

08 Apr 2020

APAC real estate investing The future of five in five

Here we focus on five developed markets in Asia Pacific, namely, Australia, China, Japan, Hong Kong and Singapore.

The Five, as we term these markets, are not entirely representative of the high growth Asian Century story that most investors are now familiar with.

So, why concern ourselves with these specific real estate markets? The Five collectively makes up more than 90% of the investable real estate universe in Asia Pacific. And the truth is, investors enjoy much deeper liquidity and ease of transacting in these five Asia economies than they do in many other emerging markets.

Also, the reality is, structural fundamentals in the Five are consistently solid and key real estate drivers have been entrenched, tested and proven, over the last few decades. They offer up opportunity sets that are largely heterogenous across market cycles, and that augments the appeal of a mid-to-long term allocation towards real estate strategies in these five markets.

Key investment themes to watch

1. Space as a service to become mainstream

Corporates and end users are increasingly rejecting the notion that real estate is a fixed cost, and are embracing the concept of space-as-a-service, enabled by shifts in technology and mindsets. This has manifested itself in self-storage, co-working and short-term accommodation, amongst others. From the landlord and investor point of view, the commercial viability of flexible solutions is debatable, at least for now. However, the real estate industry has always been quick to respond to the changing needs of end-users and this cycle is no different.

2. Housing the masses is a big deal

Multi-family investment is on the rise, going from 13% of global transaction volumes in 2009 to 23% in 2018. Interest is supported by structural demographic changes such as growing urban populations and delayed family formation. These facilitate the growth of the rental market. Rising home prices and declining affordability further support renting over buying.

Key markets for multi-family real estate investments include Australia and Japan – Tokyo, Osaka and Nagoya.

Top 5 APAC markets make up 90% of investable universe

Source: MSCI (data available as at June 2019)

3. Demographic pressure

Projections by the United Nations show that 11.8% of the population in APAC will be older than 65 by 2030, up from the 7.5% as at 2015, and that for the five countries that we focus on will be even higher at 18% by 2030 – or an average addition of 8.3 million people per year between 2015 and 2030.

An aging population would also unlock the potential for new asset classes – not least senior housing, which itself runs the gamut from luxury retirement villages to the more operationally-intensive nursing care facilities.

Another way to play the aging theme would be to invest into property sectors that would benefit from increased silver spending, such as healthcare services and even select hospitality plays.

4. Niche segments joining the mainstream

Can anything that takes up physical space be monetized and used to generate returns? Recent years have seen the rise of education as an investment theme – whether that means investing into a fund with a portfolio of kindergartens or purpose-built student accommodation – but other more exotic asset classes which have crossed hands include carpark spaces in Hong Kong and columbariums in Seoul.

Real estate private equity will continue to seek out these property types and operating platforms, but as a word of caution, we think it is important to highlight that niche property types face two major challenges . Read our full report to find out more.

5. ESG awareness in the build environment

There are important reasons for real estate players to take climate action given that 11 of 15 cities most at risk to rising sea levels are in Asia . As the whole sector starts moving in this direction, companies which are early adopters and actively incorporate environmentally-friendly measures such as minimizing energy consumption through design features, attaining high energy efficiency standards, and generating energy on-site might eventually be rewarded with a big-enough "green premium" to offset any upfront costs needed to get there.

What about the potential of rental income in each of the top five real estate markets in APAC?    

Read our full report on real estate markets in Japan, China, Hong Kong, Australia and Singapore.

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