Emerging Trends in Real Estate - Asia Pacific 2020

Emerging Trends in Real Estate - Asia Pacific 2020
Emerging Trends
in Real Estate      ®

Asia Pacific 2020
Emerging Trends in Real Estate - Asia Pacific 2020

                                              iv   Executive Summary
                                              vi   Notice to Readers
                                              1    Chapter 1: Defying Gravity?
                                              3    Geopolitics: the Good, the Bad, and the Ugly
                                              4    Trade Friction: Winners and Losers
                                              6    More Caution, More Core
                                              7    Spreading the Load
                                              7    Yields Begin to Rise . . .
                                              8    . . . But Not Everywhere
                                              9    Focus on FX
                                             10    Pockets of Distress
                                             12    Sustainability: Coming of Age
                                             13    Coworking: Does It Work?
                                             14    Retail: Is Asia Different?
                                             16    Focus on the End User
                                             16    Nervous about Niche?
                                             18    Accounting for Climate Change
                                             19    Embracing Technology

                                             22    Chapter 2: Real Estate Capital Flows
                                             24    Global Funds Under-Allocated
                                             25    Japan’s Slow-Motion Exodus
                                             26    Fundraising Slows
                                             26    Dry Powder Builds
                                             27    Tighter Bank Lending
                                             28    Nonbank Lending Picks Up . . .
                                             29    . . . But Appetite Remains Low
                                             30    REITs on the Rise
                                             30    Singapore
                                             31    Japan
                                             31    Australia
                                             31    India

                                             34    Chapter 3: Markets and Sectors to Watch
                                             35    Top Investment Cities
Emerging Trends in Real Estate®              47    Property Types in Perspective
Asia Pacific 2020
                                             53    Interviewees

A publication from:

                                                                                Emerging Trends in Real Estate® Asia Pacific 2020 i
Emerging Trends in Real Estate - Asia Pacific 2020
Editorial Leadership Team
     Emerging Trends in Real Estate®                                         PwC Advisers and Researchers by Territories
     Asia Pacific 2020 Chairs
     K.K. So, PwC                                                            Australia                            India
     John Fitzgerald, Urban Land Institute                                   Andrew Cloke                         Anish Sanghvi
                                                                             Bianca Buckman                       Bhairav Dalal
     Principal Authors                                                       Chelsea Hancock                      Dhiren Thakkar
     Mark Cooper, Urban Land Institute Consultant                            Christian Holle                      Tanya Tandon
     Alex Frew McMillan, Urban Land Institute Consultant                     David McDougall
                                                                             James Dunning
                                                                                                                  Brian Arnold
     Contributing Editor                                                     James McKenzie
                                                                                                                  David Wake
     Colin Galloway, Urban Land Institute                                    Jane Reilly
                                                                                                                  Margie Margaret
                                                                             Josh Cardwell
     Contributing Researchers                                                Liz Stesel                           Japan
     Michael Owen, Urban Land Institute                                      Morgan Hart                          Akemi Kitou
                                                                             Nick Antonopoulos                    Eishin Funahashi
     Pauline Oh, Urban Land Institute
                                                                             Nita Prekazi                         Hideo Ohta
     Yusnita Baharuddin, Urban Land Institute
                                                                             Rachel Smith                         Hiroshi Takagi
                                                                             Ross Hamilton                        Koichiro Hirayama
     ULI Editorial and Production Staff                                      Scott Hadfield                       Raymond Kahn
     James A. Mulligan, Senior Editor                                        Shannon Davis                        Soichiro Seriguchi
     David James Rose, Managing Editor/Manuscript Editor                     Sue Horlin                           Takashi Yabutani
     May Chow, Senior Vice President, Marketing and                          Tony Massaro                         Takehisa Hidai
       Communications, Asia Pacific                                                                               Takeshi Nagashima
                                                                             Mainland China
                                                                                                                  Takeshi Yamaguchi
     Lawreane Jamie de los Santos, Designer                                  Gang Chen
                                                                             G. Bin Zhao                          Luxembourg
                                                                                                                  Kees Hage
                                                                             Hong Kong SAR
                                                                                                                  Robert Castelein
                                                                             K.K. So
                                                                             Paul Walters                         Philippines
                                                                             David Kan                            Malou Lim

                                                                             Taiwan                               Singapore
                                                                             Jason Liu                            Chee Keong Yeow
                                                                             David Tien                           Magdelene Chua
                                                                             Bonnie Ho                            Maan Huey Lim

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     ISBN: 978-0-87420-442-1

ii   Emerging Trends in Real Estate® Asia Pacific 2020
Emerging Trends in Real Estate - Asia Pacific 2020
Executive Summary
                                                                                                                                                                                          Nonetheless, caution is widespread,
                                                                                                                                                                                                                                                Survey Responses by Geographic Scope of Firm
                                                                                                                                                                                          especially as yields begin to rise in some
                                                                                                                                                                                          markets. Unusually, geopolitics has
                                                                                                                                                                                          become the new wildcard, with China-U.S.                              Other focus
                                                                                                                                                                                          trade friction, protests in Hong Kong, and
                                                   More than a decade since the global financial crisis, Asia Pacific real estate continues                                               the spat between Japan and South Korea
                                                   to produce strong returns. But as the clock ticks down towards the end of the current                                                  causing the most concern. Interviewees
                                                   cycle, caution is increasingly embedded into investor strategies.                                                                      highlighted a handful of markets or sectors                                                                              Focused primarily on
                                                                                                                                                                                                                                                Pan-Asia focus          24%
                                                                                                                                                                                          that look most vulnerable to localised                                                                         44%       one country/territory
                                                   This despite the fact that there is no clear consensus as to whether the market is near,                                               downturns—mainland China, Hong Kong
                                                   at, or beyond its peak. In part, this is because of the heterogeneous nature of local                                                  SAR, and India—and these may offer
                                                   markets. As one Singaporean developer observed: “The risk of a market downturn has                                                     buying opportunities in the longer term.
                                                   increased significantly, but it’s market specific.” In addition, markets and sectors across
                                                   the Asia Pacific are often at different stages of their own cycles. Singapore, for example,                                            Nevertheless, sourcing deals remains as
                                                   has only now rebounded from a slump that bottomed around three years ago, while                                                        hard as ever, forcing investors to find other               Global focus             31%
                                                   other markets have been riding the same wave after six years or more. Finally, with                                                    ways to get capital into the market. Some,
                                                   economic growth continuing at a reasonable clip, interest rates remaining at near-record                                               for example, are turning to joint ventures,
                                                   lows, and with ever-increasing amounts of capital circulating around the region looking                                                buying slices of larger assets that also
                                                   for an investment home, it is hard to see where the catalyst for the next recession is                                                 allow them to spread their risk. Larger               Source: Emerging Trends in Real Estate Asia Pacific 2020 survey.
                                                   going to come from. In the words of one private-equity investor: “If you compare where                                                 investors, meanwhile, are boosting their
                                                   Asia is today versus where the developed markets are, cyclically we feel like we’re in a                                               commitment to core markets and, where
                                                   better position.”                                                                                                                      possible, core assets, with Australia,
                                                                                                                                                                                          Japan, and Singapore the most popular.          After years in the shadows, sustainability            In China, local regulations have drastically
                                                                                                                                                                                          An outlier, but a very popular one, is          is now finally becoming a priority for the            restricted outflows in 2019, but the slack
                                                                                                                                                                                          Ho Chi Minh City—an emerging-market             region’s largest investors, and also many             has been taken up by others, in particular
                                                                                                                                                                                          growth hedge against more muted core            smaller ones. Landlords have come                     Singapore and South Korea, while
                                                                                                                                                                                          market performance.                             around to the view that incorporating                 outflows from Japan are also picking up
                                                                                   Survey Responses by Country/Territory
                                                                                                                                                                                                                                          sustainable features into their buildings             and can be expected to grow rapidly in
                                                                                                                                                                                          The office sector remains the most              will allow them both to cut running costs             coming years.
                                                                                                                                                                                          popular asset class, although business          and increase rents as tenants become
                                                                              30                                                                                                          models in the fastest-growing component         more willing to pay for space that acts as a          The sheer weight of capital now in
                                                                                                                                                                                          of that sector—flexible workspace—are           magnet for talented staff.                            circulation means that competition to
                                                                              25                                                                                                          increasingly being called into question.                                                              place it in regional markets continues
                                                                                                                                                                                          The industrial and logistics space,             In terms of capital flows, cross-border               unabated. One result of this is that
                                                                                                                                                                                                                                                                                                investment funds are holding increasing
                                                    Percentage of responses

                                                                              20                                                                                                          meanwhile, is still the sector most often       investment patterns into the Asia Pacific
                                                                                                      13.6%                                                                               tipped for outperformance. While the Asia       are being affected this year by the rising            amounts of capital they are unable to
                                                                                                                                                                                          Pacific region is still undersupplied with      tide of antiglobalism in markets worldwide,           spend. When they do spend it, however,
                                                                                                                                                                                          modern logistics space, more investors          with incoming capital from the United                 financing for deals is for the most part
                                                                                                                                                                                          are now seeking excess returns in               States and Europe down 28 per cent                    readily available (apart from in China and
                                                                              10                                             10.5%
                                                                                                                                         7.1%                                             subsectors of that market, such as cold         year-on-year in the second quarter of 2019            India, where the dynamics of domestic
                                                                                                                                                                                          storage or last-mile warehouses.                to just US$2.54 billion—the lowest figure             markets have seen banks retrench).
                                                                               5                                                                                                                                                          since 2012. At the same time, however,                Lending practices have been tightened to
                                                                                                                                                                                          There is a growing perception that the          the value of cross-border deals involving             an extent, but for creditworthy investors
                                                                               0                                                                                                          retail sector in Asia has been oversold,        money from within the Asia Pacific was                there is no problem. As one Hong
                                                                                         Australia   Mainland   Hong Kong     India      Japan        Philippines   Singapore   Others*                                                                                                         Kong–based advisor put it: “There’s no
                                                                                                      China       SAR                                                                     with too many good assets penalised due         up 23 per cent year-on-year to US$7.76
                                                                                                                                                                                          to problems surfacing elsewhere in the          billion. This reflects the huge volume of             change at the top. We see easy access
                                                                                                                                                                                          world. Selective but sometimes large-           capital held by regional institutions and             for low-leveraged deals from good-
                                                                                                                                                                                          scale buying has been seen in several           sovereign funds that is outgrowing the                quality sponsors.” With interest rates in
                                                                                   Source: Emerging Trends in Real Estate Asia Pacific 2020 survey.                                       markets, with investors now increasingly        capacity of domestic markets to absorb.               the second half of 2019 reversing course
                                                                                                                                                                                          focused on adapting existing assets to                                                                to the downside, the overarching trend
                                                                                   *Includes New Zealand, Thailand, Malaysia, South Korea, United Kingdom, Germany, Belgium, Taiwan,
                                                                                   Burma, United States, Russia, Indonesia, Vietnam, and Netherlands.                                     meet the changing demands of modern                                                                   in terms of access to bank finance will
                                                                                                                                                                                          consumers.                                                                                            probably continue to be accommodative.

iv   Emerging Trends in Real Estate® Asia Pacific 2020                                                                                                                                                                                                                                     Emerging Trends in Real Estate® Asia Pacific 2020 v
Chapter 1: Defying Gravity?
Asian REIT markets have rebounded
in 2019, as interest rates in the United
                                                   This year’s investment prospect rankings
                                                   again reflect investor preference for
                                                                                                    in all areas. While placing significant
                                                                                                    amounts of capital in Vietnam remains
                                                                                                                                                      “We need to be a little bit more cautious in investing in APAC, particularly in
States began to decline. Many REITs in             regional markets that are large, liquid, and     problematic given the relatively small size       areas of the economy that are going to be impacted by U.S.-China trade
the region, and especially in Singapore,
are now on acquisition sprees to take
                                                   defensive—Singapore, Tokyo, Sydney, and
                                                   Melbourne therefore figure strongly. This
                                                                                                    of local markets and a general shortage
                                                                                                    of investment-grade assets, it is receiving
advantage of the lower cost of capital for         is partly a reflection of a flight-to-safety     strong inflows of capital as a result of
new purchases, as well as an anticipated           mentality resulting from growing concerns        incremental shifts of manufacturing
upswing in investor interest in yield-             about a global economic downturn. In             capacity away from China. Remarkably,
bearing stocks, including in particular from       addition, though, these are all markets          Ho Chi Minh City this year, also ranked
investment funds, which have become                offering significant numbers of core assets      as the top city for all asset classes in this                                While investors across the Asia Pacific                                                          Emerging signs of a potential recession
more willing to buy into REITs as opposed          that are the preferred targets of regional       year’s buy/hold/sell tables.                                                 region are notably more cautious about                                                           in the U.S. economy have only added to
to fixed assets.                                   institutional investors that today constitute                                                                                 market prospects than in previous years,                                                         concerns. In a September 2019 report,
                                                   the biggest driver of new demand for                                                                                          the jury remains out on whether the top                                                          analysts Oxford Economics stated: “Of
The first domestic Indian REIT listed in           assets.                                                                                                                       has been reached or breached. What’s                                                             seven indicators that have been strongly
2019. Its shares were rapidly bid up in                                                                                                                                          certain, though, is that concerns today                                                          associated with global recessions over
value until by the end of 2019 its implied         While investor sentiment towards local                                                                                        are greater than ever. As one interviewee                                                        the last 45 years, only two are currently
yield had compressed to under 6 per                emerging markets is now on the wane due                                                                                       commented: “I have been cautiously                                                               sending recession signals. However, one
cent—a remarkably low level for a market           to global economic concerns, Ho Chi Minh                                                                                      optimistic for years—now I’m just                                                                of these two—the U.S. yield curve—has
where risk is perceived to be high.                City received consistently strong feedback                                                                                    cautious.” And as an investment manager                                                          the best predictive record and tends to
                                                                                                                                                                                 in Australia noted: “For the past five or six                                                    send the earliest warning.”
                                                                                                                                                                                 years I’ve probably sounded like a broken
                                                                                                                                                                                 record, but it is a little bit different this                                                    Recent statistics add to the sense of
                                                                                                                                                                                 year.”                                                                                           unease. Respondents’ expectations of
                                                                                                                                                                                                                                                                                  profitability declined in this year’s survey
Notice to Readers                                                                                                                                                                The biggest single factor, as cited by                                                           to an eight-year low, while data from
Emerging Trends in Real Estate® Asia Pacific is a trends and forecast publication now in its 14th edition, and is one of the most                                                respondents to our Asia Pacific survey,                                                          analysts Real Capital Analytics (RCA)
highly regarded and widely read forecast reports in the real estate industry. Emerging Trends in Real Estate® Asia Pacific 2020,                                                 is the impact of the ongoing U.S.-China                                                          show a 20 per cent decline in year-on-
undertaken jointly by PwC and the Urban Land Institute, provides an outlook on real estate investment and development trends,                                                    trade friction, which is being felt across the                                                   year transaction volumes through the first
real estate finance and capital markets, property sectors, metropolitan areas, and other real estate issues throughout the Asia                                                  region as the Mainland economy slows.                                                            half of 2019, together with a fall in rolling
Pacific region.

Emerging Trends in Real Estate® Asia Pacific 2020 reflects the views of individuals who completed surveys or were interviewed
as a part of the research process for this report. The views expressed herein, including all comments appearing in quotes, are
                                                                                                                                                                                                                       Exhibit 1-1 Asia Real Estate Transaction Volumes by Source of Capital
obtained exclusively from these surveys and interviews and do not express the opinions of either PwC or ULI. Interviewees
and survey participants represent a wide range of industry experts, including investors, fund managers, developers, property
companies, lenders, brokers, advisers, and consultants. ULI and PwC researchers personally interviewed 94 individuals and survey
responses were received from 463 individuals, whose company affiliations are broken down below.                                                                                                                                  Domestic           Intra-Asia            Investment into Asia              % Cross-border

                   Private property owner or developer                                                 26%                                                                                                                                                                                                                            60%

                   Real estate service firm (e.g., consulting, financial, legal, or property advisory) 23%
                   Fund/investment manager                                                             21%                                                                                                                                                                                                                            50%
                   Homebuilder or residential developer                                                10%

                                                                                                                                                                                 Investment into Asia (US$ billion)
                   Institutional equity investor		 3%
                   Bank lender or securitised lender		 1%                                                                                                                                                                                                                                                                             40%

                                                                                                                                                                                                                                                                                                                                            % Cross-border
                   Other entities                                                                      15%

Throughout the publication, the views of interviewees and/or survey respondents have been presented as direct quotations from the
participant without attribution to any particular participant. A list of the interview participants in this year’s study who chose to be identified
appears at the end of this report, but it should be noted that all interviewees are given the option to remain anonymous regarding their
participation. In several cases, quotes contained herein were obtained from interviewees who are not listed. Readers are cautioned not to
attempt to attribute any quote to a specific individual or company.                                                                                                                                                                                                                                                                   10%

To all who helped, the Urban Land Institute and PwC extend sincere thanks for sharing valuable time and expertise. Without the                                                                                                                                                                                                        0%
                                                                                                                                                                                                                      Q1 Q2 Q3    Q4 Q1 Q2 Q3   Q4 Q1 Q2 Q3      Q4 Q1 Q2 Q3   Q4 Q1 Q2 Q3   Q4 Q1 Q2 Q3   Q4 Q1 Q2 Q3   Q4 Q1   Q2
involvement of these many individuals, this report would not have been possible.
                                                                                                                                                                                                                         2012           2013          2014             2015          2016          2017          2018        2019

                                                                                                                                                                                                                          Source: Real Capital Analytics.

vi   Emerging Trends in Real Estate® Asia Pacific 2020                                                                                                                                                                                                                    Emerging Trends in Real Estate® Asia Pacific 2020                           1
Chapter 1: Defying Gravity?

12-month volumes from the record levels                      Exhibit 1-2 Most Active Asia Pacific Metros H1’19                                                        Geopolitics: the Good, the                      as a spike in supply. Having said that,                investment values. According to a locally
seen in mid-2018. In both China and                                                                                                                                   Bad, and the Ugly                               the biggest occupiers in Shanghai are                  based investor who acts for a number of
Japan, quarterly volumes fell to the lowest                                                                                                                                                                           domestic companies, and the refocusing                 large institutions and sovereign wealth
levels in a decade, as both domestic and                                                                                                                              Historically, real estate investors prefer to   of the economy from exports to domestic                funds, “A couple of the big sovereign funds
cross-border investment slumped.                                                                                                                                      focus on bottom-up rather than top-down         demand–driven activities will mop up                   called to ask if this is an opportunity, but
                                                    2018 H1 ’19               Metro                Grand Total ($m)                              % YOY
                                                                                                                                                                      macroeconomic factors. Hence: “location,        that supply relatively quickly. So, there              I had to tell them, essentially, that no one
                                                        1         1      Hong Kong SAR                                   $10,637   –46%
Not all indicators are negative, however.                                                                                                                             location, location” trumps “events, my dear     could be a short window to buy.” RCA                   is selling. Apartment owners may panic-
                                                        2         2      Tokyo                                        $9,719          –19%
Indeed, there seem to be few signs of                                                                                                                                 boy, events.”                                   data show Chinese transaction volumes                  sell, but you’re not going to see anything
                                                        3         3      Seoul                                     $8,357                   –2%
regional economic instability that might                6         4      Beijing                                $5,839                                        138%                                                    falling by 19 per cent year-on-year to $15             on the commercial side. The sentiment is
trigger a widespread downturn. Inflation                                                                                                                              Nonetheless, political upheaval has             billion in the first half of 2019, with a more         wait and see—if they don’t have to close
                                                        4         5      Sydney                                 $5,763                                  17%
is in check, financial systems appear                                                                                                                                 become a common theme across the                dramatic 39 per cent fall in the second                a deal, they’re not going to close, but
                                                        7         6      Singapore                           $4,884                                             73%
well capitalised, and global interest rates             5         7      Shanghai                            $4,572                         –2%
                                                                                                                                                                      world in 2019. U.S.-China trade friction        quarter. Given that domestic players have              basically, the Singaporeans and Koreans
remain at or near all-time lows.                        8         8      Melbourne                       $2,821                           –14%
                                                                                                                                                                      may be the obvious harbinger of doom,           been handicapped by restricted access to               see it as just a blip—no one is expecting
                                                        10        9      Osaka                          $2,007                                                165%
                                                                                                                                                                      but it is hardly the lone red flag. Japan       capital, foreign buyers are now especially             carnage.”
According to one fund manager: “In                      21        10     Shenzhen                      $1,257                                             1,233%
                                                                                                                                                                      and South Korea are also engaged in a           active in the market.
most asset classes, you have reasonably                 26        11     Tianjin                       $1,237                                                 295%
                                                                                                                                                                      renewed political spat, while a series of                                                              Going forward, there was also a
decent operating fundamentals in terms                  9         12     Brisbane                     $1,217                          –21%
                                                                                                                                                                      street protests over a number of months         In Hong Kong, meanwhile, the impact                    consensus that Hong Kong is unlikely to
of occupancy levels and demand. There                   15        13     Mumbai                       $1,074                          –23%
                                                                                                                                                                      have also flared up in Hong Kong,               of street protests has begun to be felt in             suffer an exodus of businesses to other
is a limited amount of new supply,                      11        14     Taipei                       $679                           –33%
                                                                                                                                                                      wreaking havoc on the city’s retail and         earnest. Tourist arrivals were down 40                 destinations. In particular, the prospect of
credit growth to the sector has been                    13        15     Yokohama                     $503                         –56%
                                                                                                                                                                      hotel sectors.                                  per cent year-on-year in August, hotels                Hong Kong’s financial industry migrating
reasonable, [and] lending standards for                                                                                                                                                                               were on average only half full and, in the             to locations such as Singapore or
new construction have been responsible.                                                                                                                               What are the consequences from                  retail sector, one major landlord reported             Shanghai is seen as unlikely due to the
Those are all typically the areas that                                                                                                                                a real estate point of view? While              same-store sales down 50 to 90 per cent                continuing advantages offered by Hong
                                                               Source: Real Capital Analytics.
would precipitate some sort of cyclical                                                                                                                               undoubtedly negative for the markets,           over the same period. That said, the office            Kong’s reliable legal system, its low tax
downturn.”                                                                                                                                                            the current dislocations are also creating      sector has emerged largely unscathed.                  rate, and its proximity to mainland China.
                                                                                                                                                                      opportunities. In China, for example, the       Although central business district (CBD)               Given that the Mainland’s capital account
Other indicators are also supportive. As                     Exhibit 1-3 Real Estate Firm Profitability Trends                                                        trade friction has followed hard on the         vacancies were up and rents were down                  is unlikely to open up, Shanghai will remain
one investor pointed out: “Real estate still                                                                                                                          heels of an ongoing regulatory crackdown        marginally, there has been little effect on            unable to compete as a major finance hub.
feels like an attractive asset class vis-à-vis                                                                                                                        on alternative finance products as well
bond yields and where interest rates are.”                                                                                                                            as a general tightening of credit imposed
According to another, liquidity is also a                                                                                                                             by the central bank. Interviewees based
                                                                                                                                                                                                                            Exhibit 1-4 Most Problematic Issues for Real Estate Investors
factor: “We’ve been at the top now in Asia                                                                                                                            in China warned that the malaise was
for about five years, and every year we sit                                                                                                                           starting to gain traction. In the words of
down and say, ‘Well is this it, are we now                                                                                                                            one private-equity investor, the economy
                                                         Excellent                                                                                                    “is getting hit harder than people outside
ready for a correction?’ And then all these                                                                                                                                                                                                   Trade wars      6.64
people rock up with billions of dollars to                                                                                                                            China realise.”
spend on Asian property and of course                                                                                                                                                                                                          Low yields     6.32
they support values.”                                                                                                                                                 As a result, for many multinational
                                                         Good                                                                                                         corporations (MNCs), expansion plans                       Global economic growth       6.12

Meanwhile, DWS research projects                                                                                                                                      are now on hold. “They’re more treading                     Asian economic growth       6.00
unlevered aggregate total returns for core                                                                                                                            water than anything else, which certainly
Asia Pacific real estate to range between                                                                                                                             impacts commercial office leasing,” one                Lack of investable properties    5.85
5.5 per cent and 7.6 per cent annually                                                                                                                                China investor said. However, “If you look
                                                                                                                                                                                                                                        Currency volatility   5.84
from 2019 to 2023, well below the 2018                                                                                                                                at the market as a whole, the growth story
figure of 10 per cent.                                  2006 2007 2008 2009 2010 2011              2012 2013 2014 2015 2016 2017                 2018    2019 2020    is still very much about the tech sector,            Competition from Asian buyers      5.74
                                                                                                                                                                      and Chinese tech firms are doing very
                                                                                                                                                                      well. They are absorbing a lot of space.            Competition from global buyers      5.22

                                                                                                                                                                                                                                          Cost of finance     4.36
                                                               Source: Emerging Trends in Real Estate Asia Pacific 2020 survey.                                       According to a different fund manager,
                                                                                                                                                                      “There is clearly an impact in the                    Impending interest rate hikes     4.04
                                                                                                                                                                      Shanghai and Beijing markets. Shanghai,
                                                                                                                                                                      in particular, has recently had quite a                                               1      2     3       4      5        6   7     8        9
                                                                                                                                                                                                                                                          Least                       Neutral                     Most
                                                                                                                                                                      bit of office development – so you have                                          problematic                                             problematic
                                                                                                                                                                      shrinking demand from MNCs nervous
                                                                                                                                                                      about the trade friction at the same time
                                                                                                                                                                                                                              Source: Emerging Trends in Real Estate Asia Pacific 2020 survey.

2   Emerging Trends in Real Estate® Asia Pacific 2020                                                                                                                                                                                                                  Emerging Trends in Real Estate® Asia Pacific 2020     3
Chapter 1: Defying Gravity?

Singapore, meanwhile, is too far away             Trade Friction: Winners and                      One result of this migration is that space         and metro, so the traffic is surmountable,          Exhibit 1-5 Projected Change in Economic Factors, Next Three to Five Years
to be a major player, offers minimal cost         Losers                                           in emerging-market logistics and business          and of course liquidity in Bangkok is the
savings compared with Hong Kong, and                                                               parks “has been selling like hot cakes”,           best, in terms of buying and selling real
struggles with a number of challenges             Another way that trade friction is altering      as investors scramble to find a home for           estate generally. As companies become
of its own, including difficulties obtaining      regional investment patterns relates to the      new factories. Industrial real estate rents        more fly-in fly-out, and as there’s a lot                                                         Worsen         No change     Improve
working visas for staff.                          migration of manufacturing capacity out          rose by double digits year-on-year in the          more regionalism, a high-cost base like
                                                  of China. This shift had been underway           first half of 2019 in several Vietnamese           Singapore, especially with its tightening
                                                  for several years, but tariff hikes have
                                                                                                                                                                                                                  Global economic growth
Still, with so much capital circulating in the                                                     provinces, according to Savills research,          visa requirements and high home prices,
region, certain markets probably stand            now accelerated the process. While the           including 54.6 per cent in Binh Duong and          make places like Bangkok an interesting                            Construction costs
to benefit. Little new capital is finding its     amount of capacity leaving China is still        31.1 per cent in Tay Ninh, northwest of            option as a base.”
way to China, for example, which must             small relative to the total, even a minor        Ho Chi Minh City. With incoming foreign                                                                         Asian economic growth
therefore be heading elsewhere. As one            shift in a market as big as China can have       investment, meanwhile, rising 69.1 per
fund manager said: “I think at the margins,       a major impact on the emerging-market            cent to US$16.74 billion in the first five                                                              Competition from Asian buyers
people hesitant to put money to work in           economies where most of the outgoing             months of the year, Vietnam is now well-
mainland China and Hong Kong SAR will             capacity is now heading. So far, the prime       entrenched as the favoured China-plus-                                                                                Yield compression
perhaps be even more focused on Tokyo             beneficiaries have been South East Asian         one model.
and Australia. And maybe Singapore is             economies, although some countries have
                                                                                                                                                                                                                              Cost of finance
also a net beneficiary of what’s going on         benefitted more than others. According           Another result is that Bangkok is now
in China.”                                        to one interviewee: “Over the past year, of      figuring increasingly as a candidate for                                                            Availability of investable properties
                                                  the 25 major industrial refugees that have       multinationals’ regional headquarters.
                                                  left China, most have gone to Vietnam,           According to one executive active                                                                                                               0%       20%        40%     60%       80%      100%
                                                  Thailand, or Myanmar.” Indonesia has             throughout South East Asia, “Thailand is
                                                  so far seen little activity, and the same        featuring more and more in people’s minds
                                                  applies to the Philippines. This is because,     just because executives like being in
                                                  although “they’ve been poking around,                                                                                                                     Source: Emerging Trends in Real Estate Asia Pacific 2020 survey.
                                                                                                   Bangkok. The quality of lifestyle products
                                                  they’re very used to competing on tax            for their families is abundant, people have
                                                  incentives, and that’s where Vietnam             gotten used to commuting by the Skytrain
                                                  trumps the Philippines, despite having a
                                                  more opaque legal contract system.”

China: Key Themes
Despite a slowing economy, concerns               A few years ago, foreign investors often         loosening has been allowed for small and           for developers, investors, and consumer        buyer of a mixed-use development site                 growth prospects, but it is not likely to
over ongoing trade friction, and a tighter        had trouble landing deals in China’s             medium-sized companies. “We’re still               buyers and introduced price controls for       will be able to sell the residential element          achieve the growth levels it has been
regulatory environment, more and more             primary cities. Today, however, the              seeing a very tight lending market towards         residential properties in some cities, has     as usual, but must continue to hold the               historically achieving. We are probably
overseas investors are beating a path             number and size of such transactions             real estate, [and] as of right now, I don’t        led some investors to take a cooler view       commercial part of the development                    more enthusiastic about areas or assets
to Chinese real estate markets. First-tier        have increased significantly. “I think there’s   see that changing,” one developer said.            of China. However, the logistics sector        for 10 years or more after construction               within the Chinese economy that face
cities, and especially Shanghai, are today        been a dramatic shift over the last few                                                             continues to be a favourite. According to      is complete. This naturally makes life                domestic consumption.”
regarded as gateway destinations where            years,” one investor said. “Historically,        The Chinese office sector has been the             one overseas investor: “We are looking at      difficult for fund managers, unless they are
the largest global institutions feel they         the Chinese [imposed] tight controls over        asset class hit hardest by the trade friction,     some logistics deals in China. There’s still   investing in conjunction with a source of
must have a presence as they diversify            foreign capital entering the market, and         although investors continue to selectively         a massive undersupply of good-quality          long-term capital. As a result, “we’ve been
their portfolios.                                 it was very difficult to compete against         target assets in the biggest destinations.         stock, and it’s hard to get the land. It       moving to more brownfield, value-add
                                                  the locals. Clearly, as the economy has          According to one fund manager, “We                 takes years to line those deals up, but        projects,” one fund manager said. “The
Commercial real estate transaction                started to slow, you have less aggressive        prefer to invest in the first-tier cities, where   they certainly seem to lease well and          requirements on greenfield development
volumes in China hit a record high US$25          domestic capital and a weaker Chinese            we tend to see higher levels of growth,            quickly once they’re built. There is massive   are becoming onerous for anyone
billion in the first half of 2019, according to   currency, but there is also a desire from        greater levels of liquidity, and larger            domestic growth in consumption, which          investing via a fund.”
JLL. The results were driven by a bumper          Beijing to see more foreign capital come         opportunities. Cities that have the most           is supporting logistics, the trade war
first quarter, with investment volumes            into China.”                                     innovative companies, particularly oriented        notwithstanding.”                              Finally, a number of interviewees predicted
rising 174 per cent year-on-year to some                                                           towards the technology sector, are where                                                          that the days of “easy growth” have
US$17 billion. As usual, most activity was        A further boost for foreign investors has        you have the highest growth.                       A notable change in markets in first-tier      already ended in China. According to one
focused on Shanghai, which saw US$10.9            been Beijing’s reluctance to slacken                                                                cities has been requirements in public         investor: “We still want to invest; however,
billion of transactions, making it the fourth-    lending restrictions for domestic real           The current regulatory environment,                land auctions insisting that buyers agree      we do have to be cognizant of the fact
most-liquid city in the world, behind only        estate buyers, even though some                  which has tightened access to capital              to long-term ownership. For example, the       that growth is slowing. China has fantastic
New York, Tokyo, and Paris.

4   Emerging Trends in Real Estate® Asia Pacific 2020                                                                                                                                                                                                Emerging Trends in Real Estate® Asia Pacific 2020   5
Chapter 1: Defying Gravity?

More Caution, More Core                                  Exhibit 1-6 Top Eight Metros Areas Share of APAC Volume
                                                                                                                                                                 Beijing, and Sydney—all large markets with      Yields Begin to Rise . . .                      per cent as of June 2019, the outward
                                                                                                                                                                 core assets. According to one investor,                                                         move may be attributed to social tensions.
The reluctance to declare a downturn                                                                                                                             “We’ve been super defensive for the past        For the past four or five years, real estate
                                                                                                                                                                                                                                                                 But yields have also begun to expand in
does not mean that Asia Pacific real                                                                                                                             three years, just looking at things where       professionals across many markets have
                                                                                                                                                                                                                                                                 major markets such as Melbourne and
estate investors have their heads in the                                                                                                                         there is really strong local demand and         been wearily sucking their teeth and
                                                                                                                                                                                                                                                                 Tokyo. Whether this turns into a trend
sand. More and more, they are turning              80%                                                                                                           that are very, very affordable.”                declaring that cap rate compression
                                                                                                                                                                                                                                                                 remains to be seen, but as one interviewee
to defensive strategies in order to hedge                                                                                                                                                                        cannot go on. So far, however, they have
                                                                                                                                                                                                                                                                 noted: “I can’t see cap rates getting
against a potential reversal.                                                                                                                                    Another said, “We have become extremely         been wrong, with transaction yields
                                                                                                                                                                                                                                                                 lower. I know the U.S. has cut interest
                                                                                                                                                                 disciplined in terms of underwriting and        continuing to drop incrementally or at least
                                                                                                                                                                                                                                                                 rates, but I really cannot see any sensible
One way of doing this is to hold onto                                                                                                                            making sure the rental growth profile is        remain compressed.
                                                   70%                                                                                                                                                                                                           opportunities for cap rates to [continue to]
investments longer. Our 2020 survey                                                                                                                              something that we validate extensively.                                                         come down.”
confirms a steady decrease in shorter-                                                                                                                           We also need to be focused on costs             More recently, however, office yields in
term plays over the last five years and a                                                                                                                        such as tenant incentives, capex [capital       some markets have begun to turn. In Hong
corresponding increase in longer-term                                                                                                                            expenditures], and maintenance.”                Kong, where cap rates moved out 35 basis
investment horizons, with more than twice          60%                                                                                                                                                           points from their 2018 lows to reach 2.6
as many respondents (i.e., 24 per cent)
indicating an intention to hold for 10 or
more years compared with 2016 data. To
                                                                                                                                                                 Spreading the Load                                   Exhibit 1-8 Asia Office Yields
an extent, this phenomenon also reflects
the increasing volumes of institutional            50%                                                                                                           Another way to reduce risk is to share it
                                                            ’08      ’09       ’10     ’11      ’12     ’13      ’14        ’15     ’16        ’17   ’18   ’19
money now looking for an investment                                                                                                                              with others. Larger players are therefore
home.                                                                                                                                                            increasingly willing to structure deals as
                                                           Source: Real Capital Analytics.
                                                                                                                                                                 partnerships, and are even turning to                   Hong Kong SAR          Singapore    Seoul      Sydney        Melbourne       Tokyo
According to one fund manager, “Over                                                                                                                             funding investments as a way to diversify.
the next 12 to 24 months, we would like                                                                                                                          JLL reported that Asia Pacific investors
to rebalance a little bit by doing more core                                                                                                                     racked up some $13 billion of joint venture      10%
                                                        Exhibit 1-7 Time Horizon for Investing
investments, buying a steady stream of                                                                                                                           transactions in the first half of 2019, after
cash flows with a long weighted-average                                                                                                                          an equally busy 2018. “These deals help
lease length and downside protection. So,                                                                                                                        investors access prime assets with large
even if there is a correction, we still have                                    2020         2019      2018        2017           2016
                                                                                                                                                                 lot sizes and also reduce concentration
those cash flows coming in and are not                                                                                                                           risk,” according to one investment adviser.
dependent on capital gains.”
                                                                                                                                                                 Joint ventures and club deals are                 6%
There is also a flight to quality in terms of               1–3 years                                                                                            particularly favoured in China, where a
location. RCA data show that since the                                                                                                                           number of recent deals have resulted
third quarter of 2017, investors’ caution,                                                                                                                       in partnerships between domestic and              4%
expressed by their preference for core                                                                                                                           international investors, often involving
markets, has been rising (see Exhibit                                                                                                                            multiple partners. Anecdotal evidence,
1-6). “Investors generally are probably a                                                                                                                        however, also suggests that some larger
                                                            3–5 years                                                                                            investors, who in the past have been              2%
little bit more cautious on opportunistic
                                                                                                                                                                 more inclined to target joint ventures                   2007 2008 2009 2010 2011 2012 2013             2014 2015 2016      2017 2018 2019
[investing] and leaning a little bit more
towards core strategies because of their                                                                                                                         or club deals, are beginning to invest
concerns around valuation and risk. So                                                                                                                           in funds once more. According to one
they are orienting a little bit more towards                                                                                                                     fund manager, “We hear that some
                                                           5–10 years                                                                                                                                                   Source: Real Capital Analytics.
lower-risk strategies and probably a little                                                                                                                      investors that you don’t think of as fund
bit away from more cyclical asset classes,                                                                                                                       investors are going into multiple funds. We
like hotels, and more towards less risky                                                                                                                         understand this is partially to reduce risk
assets,” one investment manager said.                                                                                                                            but also a way to gather information—if
                                                                                                                                                                 you are investing with five fund managers,
This assertion is also backed by the data.               10–plus years                                                                                           you have five research departments and
RCA statistics for the first half of 2019                                                                                                                        acquisitions teams to tap into.”
show a 39 per cent fall in hotel investment
volumes. The top metropolitan areas for
                                                                           0            10             20              30                 40          50
real estate transactions in the first half
of 2019 were Hong Kong, Tokyo, Seoul,
                                                           Source: Emerging Trends in Real Estate Asia Pacific 2020 survey.

6   Emerging Trends in Real Estate® Asia Pacific 2020                                                                                                                                                                                                       Emerging Trends in Real Estate® Asia Pacific 2020   7
Chapter 1: Defying Gravity?

. . . But Not Everywhere                          In any event, the mild unwinding of cap     because no one can find a home for the          Focus on FX                                                                        natural alternative to conventional hedging                dramatic movements. You can do well
                                                  rates seen in some locations still leaves   capital, so you’re finding extraordinarily                                                                                         strategies. Overseas investors also tend to                at the property level and then lose it on
This reversal in cap rates is hardly              prices very much on the risk side of the    low cap rates for assets that are, frankly,     Instability in global currency markets                                             borrow in local currencies in order to gain                the currency. Generally speaking, it is so
universal, however, and in some locations,        risk/return spectrum as too much capital    an opportunistic play. And that’s the funny     means that exchange rates and foreign                                              a partial hedge.                                           expensive to hedge that it takes a massive
yields have continued to compress.                continues to chase too few assets. “The     thing about it. In a lot of cases, you should   exchange (FX) hedging strategies are                                                                                                          knock off your returns and, until you have
                                                  weight of capital has readjusted all the    be saying, “Time to hit the door.”              becoming increasingly important for                                                In some cases, FX hedging can have                         some certainty about when your money is
In India, for example, some observers             returns,” as one Singapore-based fund                                                       returns.                                                                           a significant positive effect on returns,                  coming out, it is difficult to actually hedge
see substantial compression of high-end           manager said. “It has mispriced risk                                                                                                                                           depending on the currency pairing. For                     it effectively.”
office yields as the economy continues                                                                                                        According to one European investor,                                                example, as of mid-2019, Singaporean
to mature. “I think India is the next big                                                                                                     currency is “an important factor in every                                          capital received much stronger currency                    The most notable trend in the past 12
growth story—in the same way we saw                                                                                                           transaction, [but] now the impact can vary.                                        returns in Europe or Japan than it did in                  months has been the strength of the U.S.
one-off yield compression in China over                 Exhibit 1-9 Office Sector Cap Rates, Core Locations H1 2019                           It is huge in certain places like India, [while]                                   Australia. As one adviser commented:                       dollar, particularly compared with the
the last 15 years, we’ll [also] see one-off                                                                                                   there is a lower impact in places like Japan                                       “There is a strong FX arbitrage for Asian                  Indian rupee, the Australian dollar, and the
yield compression in India.” This is the                                                                                                      and Singapore.”                                                                    investors into Europe at the moment and                    Chinese yuan.
major reason India is so popular amongst                                                                                                                                                                                         [also] from the U.S. into anywhere else.”
those deploying patient long-term capital.                                                                                                    Approaches to currency hedging vary
Income-producing Indian properties are                          Country              City           Range           Outlook                   widely. Broadly speaking, European, South                                          Nonetheless, currency movements can
now in huge demand—so much so that                           Australia           Sydney           4.00–5.00                                   Korean, and Japanese investors are more                                            make life difficult. According to one
investors are sometimes willing to enter                                         Melbourne        4.25–5.00                                   inclined to hedge, while very large global                                         investor, “Currency is becoming more
into forward purchases of Indian assets                                                                                                       investors tend to adopt diversification as a                                       of a factor because we have had some
with strong developers in popular locations                                      Brisbane         4.75–5.75
such as Hyderabad and Bangalore.                                                 Perth            4.75–6.50
                                                             New Zealand         Auckland         5.00–6.50
According to one locally based consultant,                                                                                                                                           Exhibit 1-10 Internal Rate of Return Impact to Investor Returns Using Cross–Currency Swaps
                                                                                 Wellington       5.50–7.50
eight to 10 (mainly foreign) investors
are now competing for each income-                           China               Beijing          3.00–4.50
                                                                                                                                                                                                                                          Home currency (investor capital from…)
producing asset brought to market.                                               Shanghai         3.00–4.25
“Bidding wars normally start at around 8.5                                                                                                                                                            Hong Kong SAR   Japan    Mainland China   Singapore      South Korea         Europe          Australia       U.K.        U.S.A.
                                                                                 Guangzhou        3.75–4.75
to 9 per cent and we’ve seen numbers go                                                                                                                                                                   (HKD)       (JPY)        (CNH)          (SGD)          (KRW)              (EUR)           (AUD)         (GBP)        (USD)
even tighter to 7.5 per cent. From a global                                      Shenzhen         3.50–4.50
                                                                                                                                                                                    Hong Kong SAR
                                                                                                                                                                                                           N/A        –2.06%      0.91%           0.01%          –1.14%            –2.02%          –0.43%        –0.81%        –0.03%
investor’s perspective, this may not seem                                        Hong Kong        1.50–2.80                                                                             (HKD)
too bad, but given the risks Indian markets
                                                             Japan               Tokyo            2.20–3.50                                                                             Japan
                                                                                                                                                                                                          1.99%        N/A        2.91%           2.01%          0.87%             –0.02%           1.58%        1.19%         1.97%
have, I think people are overexcited.”                                                                                                                                                  (JPY)

                                                                                                                                              Property currency (investing into…)
                                                                                 Osaka            2.80–4.00
                                                                                                                                                                                    Mainland China
Meanwhile in Australia, recent interest                      South Korea         Seoul            4.00–5.00                                                                             (CNH)
                                                                                                                                                                                                          –0.92%      –2.96%       N/A           –0.90%          –2.04%            –2.93%          –1.33%        –1.72%        –0.94%
rate cuts, combined with continued rental                    Singapore           Singapore        3.00–3.75                                                                           Singapore
growth in the Sydney office market, have                                                                                                                                                                  –0.03%      –2.07%      0.90%            N/A           –1.14%            –2.03%          –0.43%        –0.82%        –0.04%
led some to suggest that further cap                         India               Gurgaon          8.00–8.75
                                                                                                                                                                                     South Korea
rate compression is on the cards. The                                            Mumbai           8.00–8.75                                                                            (KRW)
                                                                                                                                                                                                          0.88%       –1.16%      1.81%           0.91%            N/A             –1.12%           0.48%        0.09%         0.87%
reason, according to a Sydney-based                                              Bangalore        8.00–8.75                                                                            Europe
fund manager, “is historically strong                                                                                                                                                   (EUR)
                                                                                                                                                                                                          1.96%       –0.08%      2.88%           1.98%          0.84%              N/A             1.55%        1.17%         1.94%
occupational markets with a macro overlay
of interest rates being lower for longer—the                                                                                                                                            (AUD)
                                                                                                                                                                                                          0.39%       –1.65%      1.31%           0.41%          –0.73%            –1.62%            N/A         –0.41%        0.37%
10-year bond rate is below 1 per cent
                                                         Source: CBRE.                                                                                                                   U.K.
now.”                                                                                                                                                                                   (GBP)
                                                                                                                                                                                                          0.75%       –1.29%      1.67%           0.77%          –0.37%            –1.26%           0.34%         N/A          0.73%

                                                                                                                                                                                                          0.02%       –2.02%      0.94%           0.04%          –1.10%            –1.99%          –0.39%        –0.78%         N/A

                                                                                                                                                                                                     Source: JLL.

8   Emerging Trends in Real Estate® Asia Pacific 2020                                                                                                                                                                                                                               Emerging Trends in Real Estate® Asia Pacific 2020   9
Chapter 1: Defying Gravity?

Japan: Key Themes
In developing Asian nations, the                  Interest in office assets is buoyed by           High prices in the office sector have seen      Osaka, and Nagoya have been unchanged         modern warehousing stock has provided             “Fifteen years ago, these were secondary
fundamentals of demographics and                  “super-strong fundamentals,” according           many investors turn to the multifamily          for 16, 12, and six quarters respectively,    bumper opportunities for developers and           cities where you could chase yield, but
economic growth underpin real estate              to one private-equity investor. “It’s been       residential space over the last few years,      according to CBRE research. However,          investors. Nor is there any sign of the           there was always an underlying problem
investment and—for investors active in            impressive to see the steady demand for          but competition for assets has driven           there are pockets of growth: Ginza,           logistics boom ending—vacancy rates               of liquidity. However, Osaka, Nagoya, and
those markets—outweigh short-term                 office—I think that’s surprised most people      cap rates to levels that some see as            Tokyo’s prime shopping district, is seeing    in the core markets of Greater Tokyo,             Fukuoka repositioned themselves after
difficulties and barriers to entry. In Japan,     because there’s been substantial supply          prohibitive. According to one Tokyo-based       rising rents and interest from investors.     Osaka, and Nagoya have been declining,            the financial crisis and expanded their
the situation is precisely the opposite:          in 2018 and 2019. But that’s pretty much         investor, “The pricing is so tight we’ve                                                      according to CBRE, with vacancies in the          economic base. I don’t think these cities
gross domestic product (GDP) growth               been spoken for, so the office market in         stopped looking at residential. We still see    According to one investment manager,          Tokyo Bay Area falling to zero in 2019 for        are secondary anymore—they’re just not
has rarely reached 2 per cent in the past         Tokyo is still very promising.”                  it coming across, but Tokyo is trading in       “People are looking for high street           the first time since 2008.                        Tokyo.”
five years, and the country has probably                                                           the low 3s [i.e., 3 per cent].” With some       retail, but it is not really available.
the worst demographic outlook of any              However, strong activity by Japanese             properties selling at a higher per-square-      Domestic [players], especially the trading    “Whether you are looking at assets                Major provincial cities still offer higher
nation in the world. Nonetheless, Japan           REITs and the continuing dominance of            metre price than brand-new condos in the        companies, continue to be the most            focused on e-commerce, or just general            yields than Tokyo; while office cap rates
continues to be a popular destination             large domestic developers over high-end          same submarket, operating incomes are           aggressive buyers, picking up whatever        logistics, there is a lot of life in the sector   in the capital are now between 3 per cent
among large investment funds. It offers           office space mean that pickings are slim         further reduced once leasing, renovation,       they can. But there’s also concern over the   and the price is still making sense when          and 3.5 per cent, the equivalent in Osaka
liquidity, a large base of investable assets,     for all but the best-established foreign         and turnover costs are factored in. “So,        consumption tax going up and whether          you can buy in the mid-4s as opposed to           and Nagoya might offer 50 to 75 basis
and easy access to nonrecourse bank               players. “We are trying to find stuff in the     if you’re buying a 3-cap [rate], you’re         that will be sustainable, particularly if     the low 3s,” according to one interviewee.        points in additional yield.
finance at rates that still come in at less       market, but we just cannot find enough           probably looking at a 2.5 on a net cash         tourism tails off because of the [problems]
than 100 basis points, despite moderate           to buy,” said one fund manager. “The             flow basis.”                                    with South Korea and China.”                  Difficulty placing capital in Tokyo is leading
tightening over the last couple of years.         [foreign] guys who bought office have sold                                                                                                     growing numbers of investors to look
                                                  most of it, so the sellers are domestics         Despite rising tourist numbers, the outlook     Although Japanese shoppers remain             to other domestic markets as sources
Overall investment volumes have been              and they’re selling to other domestics.”         for Japanese retail property is somewhat        seemingly immune to the appeal of             of more affordable deals. “The liquidity
slowing for the past 12 months, but asset                                                          flat: average prime retail rents in Tokyo,      e-commerce, the structural shortage of        has improved,” said one fund manager.
performance remains strong. Both the
office and residential sectors continue to
see yield compression.

Pockets of Distress                               with access to a credible capital partner        that all but the largest players are having     Other opportunities for distress relate to    is likely to worsen after the Olympics, less
                                                  will survive. Developers are struggling for      problems accessing capital. Particularly        overcapacity. In Japan, for example, the      savvy owners and operators could run into
Although in general, high prices and              survival.” As a result, distress plays are       at risk are overstretched operators in the      tourism sector has been a huge success        trouble before that.
compressed yields remain the norm, signs          becoming a major opportunity. A newly            residential leasing and coworking sectors,      story over the last few years. That may
of stress have emerged in a few markets,          introduced bankruptcy code means that            both of which have already seen business        have been too much of a good thing,           Further opportunities exist in Vietnam,
caused in particular by a lack of access          more assets are being auctioned off by           failures.                                       however—overbuilding in the hotel sector      which suffers a perennial problem from
to capital. In India, for example, while          banks at a discount.                                                                             is already creating distress situations.      overbuilding in the condo sector, and
the office sector is a runaway success,                                                            While some see a major opportunity,                                                           also in Australia, where Chinese buyers
residential developers are in a downward          Still, the prospects of structuring such         predicting “massive failures,” others           If Japan’s current diplomatic quarrel with    of residential development sites in recent
spiral. A government crackdown on                 investments using debt may be even               are more sanguine. According to                 South Korea is not resolved, distress         years bid heavily to buy land but today
banking-sector malpractice, combined              more appealing. “Anyone coming to                one Shanghai-based fund manager,                may become worse, given that nearly a         are sometimes unable to source capital to
with growing credit risk among                    India saying, ‘I have capital to deploy for      “I see a lot of people talking about            quarter of Japan’s 2018 tourists came         complete their projects. One local private
developers, has seen banks pull the plug          distress’ should be able to make equity-         it, but I hardly see any deals, for a           from that country. According to one           equity investor said that his company had
on real estate lending. With the nonbank          like returns doing senior structured last-in,    couple of reasons. First, these kinds of        Tokyo-based fund manager, “You have           been active in the “for-sale condominium
financial sector in similarly dire straits,       first-out senior debt, with potential for IRRs   opportunities are complicated. If it’s really   a lot of construction, and a lot of these     market, where there’s been a lot of
developers now have nowhere to turn for           [internal rates of return] in the region of 22   distress, it involves lawsuits, foreclosure     hotels have unsophisticated owners and        overbuilding, the capital market flow is
finance.                                          to 24 per cent”, continued the consultant.       arrangements, and negotiations, so it’s         small, undercapitalised management            disrupted, and the financing market is
                                                  “So far, few people have woken to that           hard to close. And the other reason is that     companies that are in on either a lease or    disrupted. That’s creating an opportunity
In July 2019, a report by investment bank         opportunity and just a handful of funds          people are still not desperate enough. With     an operating agreement, but they will not     we’re taking advantage of.”
Goldman Sachs predicted that 70 per               have entered the market.”                        the Chinese government already talking          have the ability to perform. These guys
cent of Indian developers could go out                                                             about relaxing money supply by cutting          have been backed but can’t service the
of business within the next two years.            In China, meanwhile, a government                bank reserve ratios and other measures,         debt. So, I think going forward there’s
“These are painful times,” one Delhi-based        crackdown on nonbank lending, together           it’s hard to see it getting worse.”             going to be opportunity once there’s a bit
consultant said. “The whole game is               with new central bank rules tightening                                                           of distress in tourism.” While the problem
going to become redefined; only people            access to real estate borrowing, means

10   Emerging Trends in Real Estate® Asia Pacific 2020                                                                                                                                                                                       Emerging Trends in Real Estate® Asia Pacific 2020   11
Chapter 1: Defying Gravity?

Sustainability: Coming of Age                      According to one fund manager, “To              environmental policies and performance,        Coworking: Does It Work?                             Exhibit 1-11 Penetration of Coworking Operators in Asia Pacific Cities
                                                   get investor funds, you need to have            with data then made available for use by
Over the last decade or so, interviewees           a real ESG [environmental, social, and          investors to support their allocations of      The failed initial public offering (IPO) of
in the Asia Pacific region have spoken             corporate governance] programme and             capital.                                       the world’s largest coworking company
wistfully about efforts to improve the             platform. When we see RFPs [requests                                                           in September 2019 has forced investors
efficiency of their buildings: green was           for proposals] come in, there’s a huge          “GRESB gives investors a number,” said         globally to reconsider the risks relating                                                                                                           6%         6%        6%
good, but all too often they were deterred         ESG section. From our perspective, you          one subscriber to the programme. “They         to the structuring of the industry’s lease
by the perceived costs of upgrading.               need energy efficiency as one of the key        can see that firm X scores 86 and firm         agreements. Usually, operators obtain
Today, though, a threshold of sorts                requirements of any asset, simply because       Y scores 50 and they can point to firm         space from landlords on long-term leases                                                                                                4.6%
appears to have been crossed. For                  the capital markets are going to start          X being better. They don’t even need to        (often including long rent-free periods,
developers, owners, and occupiers of               discounting it if that stuff is absent.”        know how. And, of course, it makes you         nonrecourse terms, and commitments                                                                                  3.7%
prime real estate, sustainability is now                                                           look worse if you’re not in GRESB.”            from landlords to undertake costly fitouts)
                                                                                                                                                                                                                                     3%          3%
intrinsically linked with quality; it is hard to   The other catalyst is the need for                                                             that is then sub-let to their own end users
imagine a worthy grade A office building           regulatory compliance. Requirements vary        One frustration for ESG advocates is the       on a short-term basis. This mismatch
not rated under the Leadership in Energy                                                                                                          means that operators at risk of losing                                    2%
                                                   from government to government around            difficulty in demonstrating a causal link                                                           1.4%     1.5%
and Environmental Design (LEED) or some            the region, with Australia and Singapore        between ESG initiatives and improved           tenants in the event of a downturn will
other local certification scheme.                  seen as the strongest promoters of              asset performance. However, according          still be bound by the terms of their own
                                                   environmental sustainability, and smaller       to one interviewee, “If you look at the        (longer) leases with building owners (who
According to one global investor, “For             developing markets having less imposing         investor-led indices and benchmarks,           are in turn exposed if an operator goes
all our office investments, we are now             rulebooks. That said, buildings in              better risk-adjusted returns are linked to a   out of business). In addition, the extent




                                                                                                                                                                                                                                     Hong Kong



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required to have some sort of green                emerging markets are often some of the          broader management of ESG issues.”             of the losses disclosed in the abortive

certification, and we are happy to spend           least efficient, meaning they have more to                                                     IPO now raises further questions. In
the money required to achieve it because           gain by introducing efficiency measures,                                                       particular, is the industry’s business model
we consider it [both] a differentiator and         even without mandatory measures.                                                               sustainable over the long term? And, more
downside protection.”                                                                                                                             important in the short term, will operators
                                                   In any event, larger real estate players                                                       still be able to raise equity and debt in an
                                                                                                                                                                                                         Source: CBRE Research, May 2019.
The drivers for this are twofold: capital          expect more regulatory control in this area                                                    environment where so few operators are
and regulatory. On the one hand, there             as governments fall increasingly in line                                                       currently profitable and competition is only
is growing awareness that upgrades to              with the Paris Accord, which aims towards                                                      increasing?
building infrastructure can create real            net-carbon-neutral economies. “The big
financial value—either through reduced                                                                                                            Given the sheer volume of coworking             As a result, landlords are now changing                             This type of relationship is becoming
                                                   risk,” said one investment manager, “is
costs such as electricity, or through higher                                                                                                      space now on the market, these risks            the way they contract with coworking                                increasingly common in the United
                                                   that you buy something now that will fail
rents. According to one investor involved                                                                                                         apply not only to coworking operators,          occupiers as they seek to reduce their risk.                        States. According to an executive of one
                                                   the regulations or the requirements of
in fitting out a building in Kuala Lumpur,                                                                                                        but also to building owners and potentially     “We are shying away from leasing out the                            U.S.-based coworking operator who
                                                   investors some way down the line. In three
“You’re looking at cloud management and                                                                                                           also banks that have financed the               whole building [to operators],” continued                           has negotiated numerous such deals,
                                                   or four years’ time, you might find that you
very sophisticated artificial intelligence                                                                                                        purchases of buildings in which there           the fund manager. Instead, “we may give                             “The landlord is now our client, so we’re
                                                   can’t lease it or sell it because it doesn’t
that can optimise the running of the                                                                                                              are large concentrations of coworking           a third or a quarter of our space to them,                          structuring these top-line revenue-share
                                                   have the environmental credentials.”
building in terms of things like predictive                                                                                                       facilities. According to CBRE, the total        and then try to include more covenants,                             structures or profit-share structures where
maintenance, occupancy usage patterns,                                                                                                            office footprint of coworking operators in      requiring a big deposit or guarantee.”                              landlords put up the majority of capital,
                                                   There is also growing pressure on this
and optimisation of temperatures using a                                                                                                          the Asia Pacific region has risen more than                                                                         but get a premium to the market rent.
                                                   front from multinational occupiers,
number of different data points, including                                                                                                        300 per cent since 2016, reaching some          Another way the flexible space dynamic                              For example, in New York our rent is $64
                                                   although the environment in the Asia
satellite weather forecasting.”                                                                                                                   54 million square feet as of March 2019.        is changing is through the emergence                                per square foot, but we’re rerenting that
                                                   Pacific is not currently as demanding as
                                                                                                                                                  The industry now occupies more than 3           of landlord/operator partnerships, with                             space for $380 per square foot. So, we
                                                   in the West. According to one adviser:
In addition, private-equity investors, large                                                                                                      per cent of office supply in the Asia Pacific   operators looking to secure management                              say to the landlord, “You’re missing out on
                                                   “Elsewhere in the world, we are starting to
real estate investment trusts (REITs), and                                                                                                        region, compared with 2 per cent in the         contracts to create flexible workspaces,                            that opportunity—you could be making
                                                   see major corporates requiring LEED Gold
most major developers almost inevitably                                                                                                           United States.                                  either within individual buildings or across                        a 40 per cent to 50 per cent premium
                                                   certification as a condition of tenancy. “We
have to cater to the requirements of                                                                                                                                                              an entire portfolio of assets. Coworking                            on a traditional rent.” Although so far
                                                   have not seen that yet here, but I think that
institutional investors from Europe                                                                                                               According to one Shanghai-based fund            companies thereby gain access to a                                  this model is relatively rare in the Asia
                                                   will eventually be the direction of travel.”
and North America, who by and large                                                                                                               manager, “Lots of smaller coworking             large client base of established corporate                          Pacific, landlord/operator partnerships
require entities in which they invest to                                                                                                          companies in China are now having               tenants while simultaneously slashing                               can be expected to evolve quickly over the
                                                   Meanwhile, more and more Asia Pacific
meet a minimum standard in terms of                                                                                                               trouble servicing [debt]. There is definitely   both rental overheads and the large capex                           medium term.
                                                   real estate players are signing up to
sustainability. Larger European pension                                                                                                           demand, but the dilemma for investors is        commitments needed to set up new
                                                   the Global Real Estate Sustainability
funds, for example, will not give capital                                                                                                         the need to consider whether there will         coworking centres. Landlords, meanwhile,
                                                   Benchmark (GRESB), which requires
to managers who cannot demonstrate                                                                                                                be a negative impact on exit in terms of        can upgrade amenities for existing tenants
                                                   managers of assets to report
environment credentials.                                                                                                                          pricing because the credit standing of the      and are spared from having to compete
                                                                                                                                                  industry is deteriorating.”                     with the operators by creating standalone

12   Emerging Trends in Real Estate® Asia Pacific 2020                                                                                                                                                                                                    Emerging Trends in Real Estate® Asia Pacific 2020                           13
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