Industry experts weigh in on how the real estate industry has adapted to the events of last year and what key lessons could define the asset class going forward
Industry experts weigh in on how the real estate industry has adapted to the events of last year and what key lessons could define the asset class going forward
A little over a year ago, 4.5 billion people – more than half of humanity – were under some form of stay-at-home restriction, and the global economy faced a shock like no other. Governments around the world responded swiftly, earmarking $10tn for economic stimulus measures in the first two months of the crisis – a sum exceeding 3x the response witnessed during the 2008 Global Financial Crisis. Slowly, global commerce found its footing and workforces adapted to the new normal, embracing digitalization with surprising affinity. However, the long-term reality of potential economic scarring effects and continued uncertainty across all sectors are still top of mind for the private capital industry.
The Asia-Pacific private real estate industry is facing a strong, albeit uneven, recovery this year. S&P Global upgraded its 2021 growth forecasts for the region to 7.3% in March, from 6.8% previously, on the back of a stronger-than-expected global expansion and rising domestic consumer demand. However, the path to recovery will differ among regional constituents. Given significant variations in COVID-19 vaccination rates and case counts, as well as a diverging capacity, or even willingness, among governments to maintain ambitious fiscal and monetary policy support, the outlook on a country-by-country basis will likely remain highly differentiated in the near term.
This raises concerns for managers and investors around the viability and adaptability of core property types like office and retail, given the huge shift to working from home in the past year. It also shines a spotlight on the potential for continued interest in specialty niche assets across the industrial and logistics sector, which caught a robust tailwind from surging e-commerce capacity during the pandemic.
Private real estate deal-makers in Asia-Pacific had a slow 2020. Only 249 transactions took place last year, for an aggregate value of $35bn; this compares with 441 deals valued at more than $55bn in 2019 (Fig. 1). The start of this year is not looking much better. Aggregate deal value in Q1 2021 fell to a mere $4.5bn – down almost 50% on the quarterly average seen last year. That said, as the recovery gathers momentum and larger proportions of the population return to public spaces, deal activity will likely regain its confidence.
We spoke to six regional experts from across Asia-Pacific to explore their outlook on the real estate industry and how they are positioning their portfolios for an eventual rebound. In the face of changing market demands, they also share how some fund managers are adapting for resilience and building out spaces to meet new needs.
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Dr Chua Yang Liang, Head of Group Research & Analytics, ARA Asset Management
Besides the current hot assets such as logistics, data centers, and e-commerce-related properties, we remain positive about the office sector as one of the drivers of recovering Asia-Pacific deal activity in 2021.
Despite alternative work arrangements adopted by many occupiers during the pandemic, there is growing consensus that the traditional office will remain, with greater emphasis placed on collaborative spaces for teams and event-based meetings. Our recent ARA tenant survey (December 2020) corroborates this view, finding that tenants in China preferred their staff to work in the office.
Offices are likely to remain as core assets providing regular income to investors. An ANREV investor survey released in January showed both institutional investors and fund of funds managers preferring to deploy capital into traditional sectors such as office and industrial within the next two years.
Geographically, investors are likely to seek safe havens like Singapore to shield themselves from an increasingly uncertain environment. Additionally, office occupier trends, such as the rise of hub-and-spoke models to cut costs and promote employee safety, could drive demand in decentralized office markets like North Sydney and Greater Hongqiao in Shanghai. In a survey by Colliers, Asia-Pacific investors are also increasingly interested in emerging business hubs, including Hong Kong’s Island East.
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Mike Pyke, Head of Institutional Capital, Moelis Australia
Clearly, most private real estate markets were illiquid during the height of the COVID-19 pandemic, as managers took stock of the situation and bid-ask spreads widened. During this time, Moelis Australia worked closely with our investors, debt providers, and tenants to ensure we could weather what appeared to be a significant financial crisis. Once we had a level of comfort on the outlook, we focused on value-add strategies for assets that had capex requirements during lockdown.
This approach has benefited from improved foot-traffic and utilization since the economy has opened. From a portfolio weighting perspective, we acquired a couple of attractive logistics assets while adopting a highly selective approach amid tight valuations. We also acquired a couple of CBD fringe, value-add hospitality assets – we are buoyant on the outlook for CBDs and believe foot-traffic will continue to rebound to pre-pandemic levels.
Our strategies for improving asset performance center around engaging appropriately and actively with the communities we serve, to ensure patron and community needs are reflected. People are inherently social in nature, and younger generations place a high value on experiences. With that in mind, we ensure our assets act as hubs for communities and have a ’destination’ feel.
On the retail front, there are many opportunities still available – not only on a relative basis but also from a value-add perspective as these spaces adapt to new needs. For example, we have witnessed tenants invest further in ’click & collect’ initiatives in our centers. This omnichannel approach will be an important feature of retailers in the future, allowing store footprints to be utilized as quasi-distribution centers for online sales.
Our outlook remains positive for Australian real estate. The low-interest rate environment is highly conducive to transactions within this space. Our clients have a strong desire for cash-generating assets and real estate is an established, cash-yielding asset class. Once borders are open and investors can travel freely, we expect transaction activity to improve. Australia’s performance during the COVID-19 pandemic only enhances its reputation as a desirable investment destination.
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Vikas Chimakurthy, CEO, Kotak Realty Fund
Our efforts have been focused on a more intense, frequent, and granular approach to asset management to ensure the health and performance of our underlying investments are preserved. To do so, we injected more capital into developments quickly where needed. We also stepped up efforts around the sales of property units and timely rental collections from our customers.
We focus on the residential and commercial property sectors in India, including office space. The residential sector in particular has seen a significant turnaround since September 2020. Residential sales volume in some markets in Q4 2020 and Q1 2021 has been near an all-time peak. The demand has been largely driven by low mortgage rates, reduction of sale prices, and the increasing importance of home life, as accelerated by the pandemic. On the other hand, commercial/office leasing has been subdued and vacancy levels have increased, leading to some increases in cap rates. Our focus right now is to fund last-mile transactions – projects in need of additional financing sources for completion – and special situations opportunities with strict credit underwriting standards.
The tenant-landlord relationship needs to be more flexible. In the current environment one has to be accommodative to tenants depending on how much their business has been affected. This flexibility is key and has been exhibited in rent-free periods, the temporary reduction in rent, flexible rental payment options, and more. In order for flexibility to be a viable solution, it has to be tailored to the cash flow needs of the tenant. The focus for us has been to work with and retain existing tenants to the best of our ability.
As an India-focused fund manager, we believe activity will be similar to what it was in 2020. The top six cities in India will continue to attract capital across all key real estate segments. In the commercial space, most of the capital deployment will be in ground-up developments, as a significant percentage of existing completed Grade A commercial assets are already held by strong developers and other institutional investors. In addition, warehousing and logistics assets will continue to attract more capital for new builds, while residential will see more last-mile funding transactions and some select transactions of new land acquisitions.
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Dae-hyung Kim, CEO at Mastern Investment Management
Like other developed markets, COVID-19 triggered robust logistics demand in Korea, underpinned by a domestic e-commerce boom. In fact, the new logistics supply in the Seoul Capital Area was estimated at 2.5 million square meters in total gross floor area (GFA) last year – a record high. We expect demand for modern, scalable logistics facilities to continue growing alongside the wider structural changes in the e-commerce market. In stark contrast, the hospitality and retail sectors faced an existential threat from lockdowns. The assets that our company operates were no exception. For instance, we have taken a selective approach to proactively support requests for rental cuts by retail tenants in the core districts of Seoul.
Despite the pandemic, Korean private real estate transaction volume reached KRW 24.4tn in 2020 – a record high. Contrary to the negative economic outlook, office and logistics sector assets saw historic peak valuations in Korea. This was driven by two factors: first, domestic liquidity expanded quickly as capital earmarked for outbound investment returned; second, asset class selection was concentrated in the office, logistics, and residential sectors, with hospitality off the lists of deal-makers.
Amid such competition, it is challenging for fund managers to deliver solid returns. To overcome this issue, we focused on our opportunistic and value-added strategy (forward-purchase) where we could identify unique discounted assets off-market. By converting mispositioned hospitality, retail, and office properties to residential and logistic assets, we were able to unlock more value.
One of the most significant themes for the Korean real estate market going forward will be the growing importance of leveraging value-enhanced conversion planning for underperforming assets in prime city locations. We expect this conversion trend to increase, particularly for impaired properties that are distressed or restructuring. We also believe sophisticated fund managers will be well equipped to deal with these complex situations and therefore access more attractive opportunities.
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Hideki Yano, President & CEO, Sumisho Realty Management
COVID-19 has divided Japan’s property market into one of clear winners and losers. The winners thus far have been logistics and residential properties, while the losers are hospitality – with high-street retail and office somewhere in between. Japan’s hotel and high-street retail sectors have been booming over the years, supported primarily by a surge in foreign visitors which help offset Japan’s aging and shrinking population. It is therefore unsurprising that these sectors are in a tough situation now. That being said, this sector will naturally recover once COVID-19 is behind us.
The big question mark is the office sector and whether it will ever recover to what it was before the onset of the pandemic. Although COVID-19 accelerated work-from-home (WFH) practices, many workplaces were already changing to accommodate more flexible working models pre-pandemic.
Current office property predictions highlight trends from urban to suburban, centralized to decentralized, and single location to multi-location. On the most extreme end of the spectrum, some say all physical offices will be replaced by virtual ones, and physical office spaces are no longer necessary. I don’t believe this is the case.
Some work activities can be replaced by digital technology, but others cannot. So long as workers are human, physical and in-person contact is absolutely necessary. On top of that, considering the housing conditions in Japan, WFH arrangements are not sustainable and desirable for most. My prediction is that conventional office spaces will remain, with a move toward multi-location working such as in a home or satellite office.
The office is the largest and most influential asset type in the real estate investment arena. Therefore, we will keep our eyes on emerging trends, and try to predict their future after COVID-19 subsides.
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Sharad Mittal, CEO at Motilal Oswal Real Estate
The initial few weeks of lockdown last year were spent trying to ascertain the development path of COVID. While we quickly adapted to the WFH environment, we had to pause new investments until we understood the potential impact of the pandemic. Similarly, we realized that our portfolio companies would need our support to adapt as well.
As a first step, we strengthened processes and communication with our partners to improve monitoring and management capabilities for our investments. Secondly, we conducted a thorough sensitivity analysis to identify projects where cash flows could be impacted. Lastly, we created a detailed 6- and 12-month action plan for each of our projects to ensure smooth management through the crisis. This proactive asset management style helped us identify issues early and take swift corrective actions.
As the lockdowns were lifted through H2 2020, we saw businesses across India start to recover. Residential real estate started gaining momentum thanks to historically accommodative government support. Factors such as bottomed-out prices, peak affordability, multi-decade-low interest rates, and above all soaring emotional values placed on homeownership drove residential real estate onto a record recovery track. We believe that demand for residential real estate will increase steadily over the next 24-36 months, as it enters a growth cycle that is less speculatively driven.
Our focus since inception has been residential investments in the top eight cities in India, while opportunistically investing in commercial real estate. We work closely with established developers to tap into this market, providing structured debt primarily in the affordable/mid-income housing segment. That said, we have largely focused on deployment in IT/ITES dominated cities, while avoiding cities like Mumbai and Delhi NCR where leverage is relatively high.
Across these large leading cities our approach has traditionally looked at early-stage investing (land stage) – but financing needs are growing. Our estimates show that around $8bn is required every year for residential projects at the construction stage in the top eight cities alone. With the ongoing liquidity crunch and COVID creating further pressure on cash flows, we saw a unique opportunity to enter the construction stage of projects more recently. In response, we launched a new real estate fund in 2021 targeting this segment. With this new fund, we have now repositioned ourselves to cater to capital requirements throughout the project lifecycle and provide a complete financing solution to developer partners.