The recent APREA (Asia Pacific Real Assets Association) conference on real assets shone a spotlight on emerging investment trends and how investors can navigate the current real assets environment across the Asia Pacific (APAC) region. In this article, I summarise key themes from a panel discussion that I had the pleasure of moderating at this event.
During the conference delegates highlighted how we live in intriguing times where real estate investors face challenges in raising capital, market volatility and rising interest rates. Transparency, governance rights and bespoke APAC real assets solutions were top of the agenda. As investment decisions become harder to make, investors tend to linger in the markets they already know and feel comfortable with for longer periods. Sustainability was a core topic of discussion right across the conference.
Two panels debated the sector’s future, trends, challenges and how best to adjust investment practices, in the context of the current headwinds. Key markets under the spotlight were China, Singapore, Hong Kong and Australia, alongside the emerging markets of Japan and the Philippines.
China’s 3Ds: Deflation, debt and demographics
A perceived lack of confidence in the market and an overall cautious mood was summed up as the “3 D’s” – deflation, debt and demographics.
According to The World Health Organisation, the population of people over 60 years old in China is projected to reach 28% by 2040. Spending patterns and personal preferences will inevitably impact the economy; however, real assets remain relevant throughout the whole lifecycle. Unsurprisingly the takeaway was that the market will adapt to trends such as developing more housing stock for an aging population.
The 3D’s inflict pain on China’s real assets market as the macro environment amplifies weaknesses as foreign capital hits a low point. China’s foreign investment landscape shifted in 2023. While it remains a significant player in APAC, recent developments which includes geo-political risk assessment have led some investors to actively diversify. This shift may have contributed to an imbalance between supply and demand in certain sectors.
Meanwhile, the India real assets market offers sizeable and attractive opportunities to international investors. The scale of developments is evident as India is one of the most active capital markets in the real assets sector. Both India and China provide opportunities to invest in real assets. Arguably, India may offer opportunities for large scale investments, especially in circumstances where a China plus One strategy is being considered by global investors..
Other markets catching attention
Panellists highlighted Japan as a potential emerging market. Signs of this potential include rising inflation and a reported 3.6% increase in salaries in 2023, suggesting a market readying itself to attract significant interest from both foreign and domestic investors.
Whilst Japan has receives much attention as a top global economy coming out of long-term stagflation, Australia remains important. Australia, panellists argued, offers an important destination for long term investments due to its macro economic stability and predictability. The residential sector and pension funds are currently of high interest in Australia, especially in Sydney and Melbourne. Due to the lack of development during Covid-19, it is now a ‘builders’ market. However, third parties such as builders and developers feel the pain of increasing interest rates. Australia’s demographics and proactive immigration policy creates a unique residential composition and thus opportunities in the real estate market.
Both Japan and Australia were said to present promising opportunities for growth in the real estate industry.
The future
The overall sentiment expressed during the conference was that investors won’t stop or decrease their investments in real estate, as investors are anticipating a repricing, an increase in value and further opportunities.
China
China is the second largest economy in the world and panellists discussed how the country remains on the front foot, when considering growth trends in the technological advancements. As a sector, technology is developing rapidly and the view was that real estate infrastructure needed to quickly adapt to these technological changes such as car charging points within infrastructures. The view from the room was that the pace of China’s response to technological advancement shows that opportunities continue to exist in China despite some short-term concerns.
Expanding into new markets
There are both advantages and disadvantages to diversifying into new markets but ultimately APAC has sizable investment opportunities and favourable demographics. However, in terms of investing, our experts see good risk adjusted returns that are just as high as if they were to risk investing in emerging markets. Risk mitigation measures for developed markets compared to emerging markets are not just regulatory, tax, and legal factors but also currency stability and lower capital leakage.
Investors are being more cautious and selective compared to previous years and are seeking more exposure in markets such as Australia and Japan. Although there may be higher risk compared to returns from such developed markets, there are still ways to minimise the operational and development risks.
Ever increasing rise of ESG consideration
In today’s world there is an increasing interest on the impact that short and long-term investment decisions may have on sustainability. Panellists highlighted the importance of adapting the right ESG approach and best practices, while also pointing out how they will differ depending on the region and sector. Europe for example was seen to place higher value on the ‘E’ compared to Asia and in particular Asia emerging markets, where ‘G’ is magnified.
The economic benefits of implementing the correct ESG strategies was notable, with a population density and geographic footprint highlighted as an important consideration. Singapore, Tokyo, and Hong Kong may find it harder to adopt certain ESG strategies because of these factors.
Consideration for ESG compliant assets may also differ depending on the country. In Australia you can get a premium for a green ESG asset whereas in Japan the value of it has not quite filtered through. However, there are other considerations made in Japan through ESG consultants including ESG diligence.
Finally
The current environment is a true test of asset management skills and advances those who can think of creative solutions. In general capital raising is difficult at the moment, no matter which market investors are in, but once capital is granted the opportunities within APAC, real assets are an inevitable choice and segment of growth..
How IQ-EQ can help
IQ-EQ has a strong foothold within Asia’s real estate market, working on seven of the 10 biggest APAC-focused real estate funds since 2019. Globally we offer a comprehensive suite of services designed to guide fund managers through the ever-evolving private real estate funds landscape.
With our recent acquisition of regulatory compliance market leaders, Compliance Asia and Lymon, IQ-EQ has emerged as the largest domain specialist in the regulatory compliance sector in the APAC region.
With an extensive international office network and sophisticated technology solutions, we offer our clients crucial local knowledge of legal, accounting and compliance requirements for commercial real estate structure and transactions.
To find out more, please don’t hesitate to reach out.
