The longstanding appeal of Australia’s markets as a destination for core investors globally continues, according to Emerging Trends in Real Estate Asia Pacific 2017, a real estate forecast jointly published by the Urban Land Institute (ULI) and PwC.
Australia’s popularity is a result of a mature market and relatively high yields, but an acute shortage of investable assets has led to reduced transaction volume in 2016.
Large amounts of foreign capital continue to arrive in Australia looking for deals, although 2015 was the first in many years where domestic purchases were the largest component of investment-grade acquisitions. This reflects the huge weight of capital that needs to be invested in Australia from domestic pension funds.
ULI Australia Chairman John Carfiand said the numbers of investors that are looking for opportunities vastly outweighs the prospects available because the amount of institutional-quality real estate is small.
“We have noticed that although foreign investors are generally reluctant to migrate away from the CBD, a lack of available stock means they often have little choice if they want to place capital,” he said.
This year’s Investment Prospects survey shows a strong shift away from last year’s favourites, which featured Sydney and Melbourne, in favour of emerging-market destinations, with two Indian cities topping a list which also includes Vietnam and the Philippines and Shenzhen in 5th position.
Other major survey findings include steep declines in the popularity of gateway cities with the exception of Shanghai which has seen a resurgence in foreign investment over the last couple of years, despite high prices.
This overarching shift reflects the difficulty in sourcing core assets in an environment where owners have few other places to invest their capital if they sell, together with the growing urgency of investors’ ‘quest for yield’ as returns are squeezed ever lower.
The top five markets for investment and development in 2017
Bangalore (first in investment and development)
The big story for investors has long been the city’s role as India’s main hub for the business process outsourcing (BPO) and IT industries. There is huge demand for space as both domestic and international companies flock to open both call-in and research-and-development centres.
Mumbai (second in investment, third in development)
Mumbai’s geography has prevented easy expansion of the city’s metropolitan area, which has made it both the most expensive city in India and the slowest growing, but a major road and rail infrastructure program will allow easier access to the centre from outlying areas, with most construction scheduled for completion before 2019.
Manila (third in investment, fourth in development)
The Philippines continues to attract positive comments, with its vibrant economy led by a booming BPO market and strong remittances from overseas workers. Today, the fundamentals appear as strong as ever. Demand is resilient and vacancies remain low, and office capital values and rents continue to show good growth.
Ho Chi Minh City (fourth in investment, second in development)
Vietnam is one of the fastest-growing economies in Southeast Asia and is probably the most popular real estate investment destination, with capital arriving from numerous sources but in particular from Japan, Singapore, and Hong Kong.
Shenzhen (fifth in investment, fifth in development)
The major recent talking point for Shenzhen has been its residential sector, where prices have soared more than 40 percent year-on-year in the first three quarters of 2016—the fastest in the world. On the commercial side, office rents have been on a steady upward trajectory for years and are now double their level of 2009.
Other findings from the report
- Core assets continue to be the favoured asset class, although product is becoming increasingly hard to source. One way around this is for investors to assume development risk by pursuing “build-to-core” projects. Although these are not traditionally considered a core strategy, many core investors are now willing to adopt this approach, especially when it involves buyers such as insurance companies that are likely to be long-term holders of the end product.
- Investors with a mandate for higher return strategies continue to migrate up the risk curve, both in terms of sectors—pursuing niche strategies such as sub-logistics facilities or data centres—and geographically, with emerging markets such as India drawing increasing attention
- Investments in metropolitan areas have become a popular theme given ongoing trends of urbanisation, land shortages in city centres, and low returns from central business district projects. Cities across the Asia Pacific including Sydney, Shanghai, Mumbai, and Jakarta are engaged in major transportation construction projects that link suburbs or satellite towns to city centres.
- In line with markets in the West, Asia is embracing the shared economy. The last 12 months have seen huge growth in the adoption of shared workspaces, either as standalone businesses that rent open-plan office facilities to individual or corporate users, or on a corporate basis, as large companies scrap conventional office layouts and embrace hot-desking and collaborative working environments. On the residential side, shared spaces are also becoming more prominent as rising prices continue to shrink apartment footprints.
Emerging Trends, which is being released at a series of events across Asia over the next several weeks, provides an outlook on Asia Pacific real estate investment and development trends, real estate finance and capital markets, and trends by property sector and metropolitan area. It is based on the opinions of 604 internationally renowned real estate professionals, including investors, developers, property company representatives, lenders, brokers and consultants.