Asia Pacific commercial real estate investment picks up in Q2 2014
Latest figures from JLL show direct investment into the region’s commercial real estate markets improve from slow start to the year.
Following the seasonally slow start to 2014, transaction volumes in Asia Pacific’s commercial real estate markets improved in the second quarter to reach US$32.0 billion, up 38 percent quarter-on-quarter, according to the latest figures from JLL. While the quarter’s volumes were still relatively flat y-o-y as a result of the disconnect between vendors and purchasers on pricing, the market has started to regain balance with deal flow expected to make a strong recovery in the second half of the year.
Stuart Crow, head of Asia Pacific capital markets at JLL said, “Over the quarter, we have seen direct investment into commercial real estate in Asia Pacific improve against the traditionally slower first quarter of the year, predominantly supported by some landmark portfolio deals in the region and larger REIT privatisation. As evidence of a strengthening leasing market gathers pace, and pent up investor demand from private equity groups, our 2014 forecast is that year-end volumes will be in line with the record levels we saw in 2013. We are expecting a very busy second half of the year.”
While cross-border purchases accounted for over a third of all deals during the quarter, this can be largely attributed to the CPPIB/Dexus acquisition of the Commonwealth Property Office Fund which was also responsible for markedly increased transaction volumes in Australia which reached US$7.8 billion by quarter-end. Mirroring the previous quarter, the larger markets of Australia and Japan accounted for the majority of the region’s transaction volumes, despite the latter slowing to US$8.4 billion, down 18 percent y-o-y.
Dr Megan Walters, head of Research for Asia Pacific capital markets at JLL commented, “Given the pricing differentials and competitive nature of core markets, we are seeing more and more investors moving up the risk curve, in terms of asset quality and market selection, and considering non-core investments. The improvements in the region’s occupier markets have supported this trend as undermanaged assets present a trading opportunity in a strong rental climate. Over the second quarter of the year, the region’s debt capital markets experienced a period of stability with less volatility in base rates and only a minor contraction in typical margins for most markets. New sources of debt and alternative strategies continue to present themselves in various markets and investors are focussing more attention towards their maturity terms and refinancing risk.”
While transaction volumes in Australia reached US$7.8 billion, up 7 percent y-o-y, if the CPPIB/Dexus acquisition of the Commonwealth Property Office Fund is removed from the equation, the market was generally slower than expected. However, cross-border investor interest in the market remains strong, most notably with Chinese investors who made a number of acquisitions in the second quarter.
Japan continued to deliver a strong deal flow throughout Q2 2014 despite volumes slowing 18 percent y-o-y to US$8.4 billion. The slowdown is likely attributed to April’s consumption tax increase which has brought forward a number of deals into Q1 as well as having a temporary influence on sentiment as investors hold off in an attempt to gauge the impact of the tax rise. The country’s investment climate remains positive with a strong pipeline of large deals and growing investor interest. Occupier markets continue to improve in line with the wider economy which is, in turn, placing upward pressure on rents and encouraging more investment opportunities to market.
Following a slow start to the year, transaction volumes in China improved in the second quarter, to reach US$4.9 billion, but remain down 14 percent y-o-y. Overall, the market appears to have stabilised following concerns earlier in the year around the growth outlook and runaway credit growth. Investor interest is picking up again and liquidity is expected to improve as a number of private equity groups on both the buy-side and sell-side are close to finding a balance on market pricing. Once the market finds this equilibrium, transaction activity is likely to pick up as investors get comfortable on pricing and more opportunities find their way to the market.
The Singapore market also recovered from a slower start to the year to record US$2.1 billion of investment, up 4 percent y-o-y, although the market remains down 18% in the first half of the year compared with 1H13. The first half saw the country’s occupier markets recover from the previous year while limited supply over the next two years has led to a positive rental outlook. Looking at ways to take advantage of this, investors are considering trading opportunities and, whilst foreign investors haven’t yet been significantly active, there is increasing interest from offshore groups.
At US$1.8 billion, transaction volumes in Hong Kong improved on a weak first quarter and are up 24 percent y-o-y. This growth, however, was predominantly driven by one large office transaction and investor sentiment remains relatively weak. The market continues to see ever increasing interest from Chinese groups in the City’s development assets.
Korea has moved further into the spotlight during the course of 2014 with increased investment volumes and growing foreign investor interest. Over the quarter, transaction volumes reached US$2.9 billion, up 26 percent y-o-y. A string of foreign investor deals in the first half of the year highlights the country’s improving fundamentals and the attractive debt terms on offer with the market being increasingly seen as a good alternative to the crowded traditional core markets.
Also gaining traction, transaction volumes in India are starting to improve as the investors continue their drive up the risk curve. A new pro-business government and a stabilised rupee will serve to further attract investors looking for high returns.
The rental market in Indonesia has slowed in 2014 following a temporary slowdown in corporate expansion growth. Investment sentiment earlier in the year was impacted by concerns over emerging markets and volatility in the rupiah; however the broader economy is beginning to settle. Once the July presidential election result is finalised, investors and occupiers alike will have a further clarity surrounding the future policy