Investment in Asia Pacific Commercial Real Estate to Rise in 2019

Global commercial real estate consultant JLL is reporting this week that Asia Pacific's overall real estate transaction volumes in 2019 are expected to rise by five per cent, though the pace of growth momentum will slow down.

"A decade into the economic cycle, investors are contending with macro risks and geopolitical uncertainty such as rising interest rates, continued trade tensions between the U.S. and China, as well as strains in the EU caused by Brexit negotiations," says Mr. Stuart Crow, Head of Capital Markets, JLL Asia Pacific.

"Against this backdrop, real estate continues to look attractive as a safe haven for investments, with its portfolio diversification benefits and relatively higher returns compared to other asset classes. However, in this late-cycle environment, investors are becoming more selective and disciplined in exiting investments because it's getting harder to find income-producing alternatives."

In Asia Pacific, real estate demand will continue to be driven by its strong demographic fundamentals. The region's urban population is expected to exceed 400 million people by 2027, while the population aged 65 and above will rise by 146 million people within the next 10 years. By 2021, Asia Pacific's e-commerce market is projected to grow to US$1.6 trillion.

Dr. Megan Walters, Head of Asia Pacific Research of JLL says, "Despite the macro concerns, we believe that this region's opportunities will mitigate the risks, spurring investors and occupiers to look into sectors that have defensive qualities or those that run on less cyclical demand drivers."

According to JLL, there are the five key trends that will shape the industry in Asia Pacific in 2019.

Growth in 'living' assets

The region's increasing urban population has seen a growing demand for alternative residential arrangements, including student accommodation, co-living, multi-family, nursing homes and aged care.

For investors, these living sectors offer attractive yields and long-term growth prospects as well as an opportunity for portfolio diversification. "These new sectors are set to outperform traditional residential assets given their efficient use of space, superior building management, and generally higher entry yields," explains Mr. Crow. "Aged care, for instance, offers returns of 11 to 14 per cent in Tokyo, and 8 to 12 per cent in Singapore."

Building flexible spaces to attract talent

Businesses are increasingly using shared workspaces as a way to foster innovation among employees and win the war for talent. This renewed focus on building human experiences has led to an uptick in flexible offices - including co-working and serviced offices - across the region.

Dr Walters says, "By 2030, flexible work spaces could comprise 30 per cent of some corporate commercial property portfolios worldwide. This means that market consolidation will become more common - landlords and developers will start to create their own flexible space offerings, form joint ventures with co-working providers, or look at mergers and acquisitions among co-working brands."

Rise of logistics and data centres

With Asia Pacific leading global e-commerce adoption, there is rising pressure for organizations to establish their data storage infrastructure as well as warehousing facilities for physical retail goods.

Mr. Crow says, "The robust rate of consumption is driving increasing investor interest into data centres and logistics in Asia Pacific. These sectors will continue to expand, with significant capital targeting emerging markets like China, India and Indonesia. Meanwhile, logistics hubs in major cities are growing. As an example, the logistics market in Sydney increased seven-fold between 2015 and 2017."

Shift towards debt exposure

With banks tightening their lending criteria, this leaves a gap for non-bank and offshore lenders to enter the market, particularly in Australia, India and China, according to Mr. Crow. As a result, there is a spike in investors turning to global offshore lenders who provide flexible forms of either debt or equity on selected projects.

Likewise, institutional investors are also expanding their footprint into real estate debt. Mr. Crow adds, "Debt investment is one way to curb risk in a portfolio and investors are increasingly looking at ways to use debt to shield them from market volatility and falling property incomes."

Evolution of smart cities

With smart city initiatives pushing ahead in Singapore, Japan, South Korea and Australia, Asia Pacific has seen an increasing need to build better digital infrastructures to maximize efficiency, sustainability and improve the living conditions for inhabitants.

Dr Walters explains: "Proptech - the convergence of real estate and technology - plays a key role in the future development of cities. As smart cities are highly data-driven, smart property development and management enable extensive data collection and analytics - both of which are crucial for cities to create more livable environments for their growing populations."