Vietnam, July 10, 2017 – Investors in Asia Pacific real estate remain heavily focused on yield spreads when seeking assets as investment intentions move further away from capital appreciation strategies. According to CBRE Research’s newly published report, New Channels for Old Favourites, the search for yield is causing investors to direct capital towards mature regional real estate markets like Australia and Japan, but to increasingly diversify away from traditional markets including Sydney, Melbourne and Tokyo.
“The investment landscape for Asia Pacific real estate has transformed significantly in the past decade,” says Robert Fong, Director of Research, Asia Pacific, CBRE. “A mix of new entrants, the emergence of first-time cross-border investors and the wider involvement of institutional investors, have not only spiked capital volumes but also changed the dynamic of this market substantially.”
CBRE Research shows that the search for yield can be attributable to broader participation of institutional investors, including sovereign wealth funds (SWFs), insurance companies and pensions funds, which collectively invested US$22.5 billion into Asia Pacific real estate between 2013-2016. With the relaxation of outbound investment regulations for insurance companies in China, Taiwan and South Korea, CBRE Research also anticipates sustainable interest in high yielding, yet longer-term, returns to match liabilities.
Markets such as Vietnam continue to hold strong appeal to investors more inherent risks and a complex and developing suite of hedging solutions available. While both yield spreads and economic fundamentals continue to reinforce appetite for real estate investment, the limited investible stock is limited, suggesting that interest is being driven more by longer-term potential than shorter-term returns.
Investors may find Vietnam’s existing yield spreads appealing on paper but its greater appeal is by far its longer term economic growth potential. Oxford Economics forecasts its GDP growth for both 2017 and 2018 GDP to be 6.65%, higher than other major ASEAN countries. Vietnam’s stable political environment and solid economic growth prospects provide a solid foundation for the next stage of growth in its real estate markets.
As rosy as the background looks, average real estate investment turnover from 2012- 2016 was just US$760 million per annum, meaning that there is a limited pool of investment grade assets.
While Vietnam has seen previous property cycles correct sharply, the fundamentals now appear more supportive for a sustainable upturn in the property cycle. Further liberalisation of the economy and removal of foreign holding limits on Vietnamese public companies are also favorable. Foreign investors may have opportunities to build up the stock of prime commercial assets over the next five to ten years.
Regionally, the search for yield is directing investor interest towards Australian real estate assets in 2017. Sydney and Melbourne continue to serve as attractive destinations for investors seeking investments with high yield spreads. Factors including solid fundamentals, robust liquidity and market transparency ensure both cities will remain appealing investment destinations, but competition for limited assets will benefit cities like Brisbane, Adelaide and Canberra, due to their lower volatility and stabilizing rental markets.
“The favorable commercial yield spreads in Australia’s two largest cities confirms their status as among the most consistently sought investment markets in Asia Pacific. But given intense competition and limited available stock in Sydney and Melbourne, investors are now more willing to move up the risk curve into less familiar but stable markets like Brisbane,” says Fong.
Japan also remains attractive to real estate investors in 2017 because to its high commercial yield spread. Investment demand has been heavily concentrated in Tokyo due to strong rental growth and robust liquidity, but will likely peak and correct as new supply enters the market in 2017-18, according to CBRE Research. However, given this backdrop, in interactions with investors, CBRE sees a diversification trend towards Japan’s regional cities such as Osaka, Fukuoka and Yokohama, driven by factors including 150bps higher yield premiums compared to the Tokyo and lower rental vacancies.
“Japanese real estate is a well-established asset class for regional and global investors that delivers consistent yield and performs as an internationally stable investment, ” says Tom Moffat, Executive Director, Capital Markets, Asia, CBRE. “The combination of continued competition to invest in Tokyo real estate and positive fundamentals in regional markets is leading more investors to look closely at the regional cities.”
According to CBRE Research, investors focusing on the mature Australia and Japan markets must manage the search for yield with a strong risk management framework. With more attention directed towards yield spreads versus capital appreciation in Australia and Japan investments, CBRE has identified three areas of risk facing investors in the medium-term.
“Irrespective of location or asset class, investors that chase an elevated yield premium understand that heightened risks are par for the course. However, the diversity of risk mitigation tactics now being used by investors in markets like Australia and Japan shows that many expect to play the yield strategy across real estate portfolios for the foreseeable future,” says Fong.
Additional themes with the Asia Pacific real estate investment space, include: