This year was predicted to be one of continued growth for the Asia Pacific real estate market by commercial real estate services company CBRE in its 2019 report and this prediction has proven true, with a number of factors evolving the real estate landscape in the region.
Real estate experts shared their insights at the recent Private Real Estate Fund Workshop in Singapore, co-hosted by IQ-EQ in collaboration with KPMG, Clifford Chance and the National University of Singapore (NUS). According to these experts, opportunities in Asia’s real estate sector are tremendous – both in terms of developing economies and emerging real estate trends offering potential for compelling investment yields – and now is the time for investors to refine their investment strategies.
Investment strategies and capital flows
As mentioned in PwC’s report entitled Emerging Trends in Real Estate Asia Pacific 2019, there are three key strategies that private real estate investors undertake in order to achieve the most compelling returns: buying quality assets below replacement cost in markets with strong fundamentals; buying, fixing and selling undermanaged properties in strong locations; or developing core assets and exiting to an increasingly large pool of core focused Asia Pacific investors.
What we note in the current scene is that developed markets have the broadest appeal. Australia remains the most popular choice, followed by Japan. However, with competition rising for assets in major cities, they are now out of reach for an increasing number of investors, meaning there is more readiness to look further afield.
CBRE’s report notes that Singapore has the largest source of Asia Pacific outbound investment, with many Singapore-based real estate investment trusts (REITs) and developers buying overseas – especially in Australia, Southeast Asia and Europe. Plus, Singapore acts as an investment hub for capital from throughout Southeast Asia due to its stable political environment, ever-growing sales and relatively strong office rentals. A total of US$1.4 billion (S$1.94 billion) was invested in real estate through Singapore in the first half of 2019.
As for emerging markets such as Vietnam and India, these continue to attract attention. At the same time, some investors are considering how markets would look in the event of a downturn. This implies more distressed debt, which has been thin on the ground in recent years, but distressed debt opportunities have appeared in markets like China and Indonesia. In these scenarios, prices may not fall much given the huge amounts of liquidity currently in circulation. PwC's report notes that if a correction is needed, this would also mean more expensive debt as well as restricted access to it, together with a flight-to-safety mentality that would tend to support mature markets, as noted above. There would also likely be a reversal of capital flows in emerging markets.
Modern-day concepts for living and working
In the case of emerging markets, several modern-day real estate concepts are gaining attention. We see that co-working spaces have taken off in Asia, lending a tech edge to the staid serviced office sector and promising better returns for landlords. But doubts remain about the viability of current operating models. The Hive is a popular provider of co-working spaces, which started in Hong Kong and has expanded to multiple locations in India, Singapore, and Vietnam. According to HDFC's Report on Real Estate, as of 2018, India has around 350 to 400 co-working spaces, compared to c.17,000 spaces worldwide, managed by around 200 operators.
E-Loft in Pune created its first co-working space in Viman Nagar by converting part of the idle space at the Keys Club Parc Estique Hotel into a work environment. E-Loft’s concept is to create collaborative working spaces for start-ups, complete with all amenities, by converting otherwise wasted inventory in hotels. E-Loft's founders note that their experience in the real estate industry and network of entrepreneurs have helped them to align the services of E-Loft to the requirements of their target audience.
Breathing Room in Bengaluru is another provider with a very clear concept. It can act as an urgent meeting place, where one can schedule meetings within the next 30 minutes. Plus, they are partnered with NGOs and art galleries.
Co-living, too, has obvious appeal in Asia’s ultra-high-cost residential environment. Asia’s gateway cities are perfect to explore how co-living works in an Asian context, although tenants in co-living complexes are not always focused on cost saving. For example, co-living spaces in India represent a $12 billion opportunity, according to a RedSeer analysis. In December 2018 it was announced that Warburg Pincus had entered into a joint venture with Lemon Tree to develop full-service accommodation for students and young working professionals. A few months earlier, in August, HDFC picked up a 25% stake in Good Host Spaces Pvt. Ltd, which offers student housing facilities under the brand name NewDoor. Other big players in the sector are Nestwaway, OYO Living, CoHo, among others.
There is consistent demand for these co-working and co-living markets across Asia Pacific and they will operate within a stabilised pace of expansion. New developments are peaking, with nearly half of new office supply concentrated in non-core or decentralised areas, mainly in Shanghai, Bangalore and Delhi NCR.
Next, if we look at the retail sector, all around the region the shopping preferences of customers have evolved. Most of them are on social media, downloading apps, buying online. Outlet malls are therefore evolving too. Retailers are adopting a holistic approach, formulating their online and offline sales channels to maximise brand experience. They are still maintaining a physical presence, with enhanced service offerings, but are slowing the pace of store network expansion or reducing the number of stores.
At the same time, there is a change towards including more food and beverage space. Outlet mall landlords have been willing to include more entertainment and leisure facilities, beyond the usual cinemas. In this context, China is way ahead – they offer fresh produce vending machines and unmanned stores with facial recognition AI technology.
Another key element for the region is that its most successful shopping centres are embedded in the community. Mall space in the Asia Pacific region tends to be far more heterogeneous than in the US or Europe.
It takes a village
The same can be said for retirement homes in Asia, with high-end retirement villages representing another rising real estate trend. Singapore has rolled out its first publicly-funded retirement village, which notably co-locates childcare and senior centres in one integrated development: The Kampung Admiralty Project, which consists of two blocks of 100 apartments. Each flat is equipped with mobility aids to help the elderly, and only Singaporeans aged 55 and above are eligible to buy one.
The development includes a big community plaza, food outlets, a hawker centre, a medical centre, a supermarket, shops and banks, as well as child and day-care facilities. Above it all, there's a community rooftop garden with a community farm and more than 100 fruit trees. There are activities for both young and old and there are spaces for solitary meditation as well as communal activities.
In Thailand, along the beaches of Kamala in Phuket, will rise MontAzure, a mixed-use development whose central components include Kamala Senior Living, an upscale retirement community, as well as Thailand’s first Café del Mar. The project is geared towards leisure-oriented, high-net-worth property seekers.
Thanks to the robust economic growth and influx of capital that has powered the region over the past decade, 2019 has seen continuing growth and evolution across Asia’s real estate market. Although some investors are looking to sell down their assets and reposition, the sheer weight of capital looking to find a home in real estate means that prices may not fall significantly even if other indicators turn south. As we edge ever closer to 2020, the region is poised to continue offering the world's largest real estate investment opportunity set.