Asia’s commercial property capital markets have come of age

That the buyer was a private mainland Chinese investor who requested their name remain anonymous shows how Asian ultra-high net worth capital is playing a more important role in the region’s investment markets. Less sensitive to the sharp rise in interest rates and eager to deploy capital at scale in real estate, Asian private investors are targeting defensive assets providing secure income streams.

Mingxuan Li, head of Asia markets at JLL in Melbourne, said three of the last five neighbourhood shopping centre transactions in the Australian state of Victoria involved mainland Chinese buyers. “E-commerce in Australia still has some way to go. You can’t go wrong with a neighbourhood shopping mall,” Li said.

The deal also speaks to the more discerning, sophisticated investor base across the region. Even before the pandemic erupted, institutional and private buyers were seeking new and more creative ways to deploy capital, partly because the opportunities in Asian commercial property have increased significantly during the past decade.

While offices still account for the largest share of transaction volumes, a reallocation of investment portfolios is under way. Although logistics properties have so far been the principal beneficiary, rental housing and life sciences are attracting considerable interest and likely to become a more visible part of the investment landscape.

This is attributable to the shift towards “alternative” sectors, or non-traditional types of property such as data centres, purpose-built student accommodation and senior living. The share of transaction volumes targeting alternatives rose from low single digits in 2015-16 to close to 10 per cent last year, according to MSCI data.

As competition for a shortage of high-quality properties intensifies, investors – particularly large institutional buyers – are becoming more flexible and resourceful in how they deploy capital. In addition to investing in Asian real estate directly or through private and listed funds, buyers are increasingly favouring “partnerships, joint ventures, club deals, recapitalisation and co-investment”, JLL notes.

Not only are Asia’s commercial property investment markets more sophisticated, domestic and regional capital is wielding more clout. In a report published earlier this month, CBRE noted that Asia-Pacific investors accounted for roughly half the total cross-border investment in the region last year. This represented an increase of 19 per cent year on year. Meanwhile, their investment outside the region fell 40 per cent.

Tellingly, mainland China – whose zero-Covid policy contributed to one of the steepest annual declines in investment activity in Asia last year – was the top destination for Singaporean investment in Asia-Pacific in 2022. It accounted for about a fifth of Singaporean outbound capital, according to CBRE data.

While Asian buyers have benefited from the withdrawal of US and European investors since interest rates began to rise sharply, other factors are at play, notably the relative resilience of Asian markets. “Commercial property values have not fallen as much as in the US and Europe. There is less risk in parts of Asia,” said Callum Young, executive director, capital markets, Asia-Pacific, at CBRE.

Asian capital is also a powerful force on the global stage. In a sign of how acquisitive Asian institutional investors have become in the past several years, Singapore’s sovereign wealth fund GIC was the world’s biggest cross-border property investor by volume in the last two years, buying nearly US$52 billion of assets, according to MSCI data.

In the first quarter of this year, Asian capital accounted for almost 75 per cent of investment in the central London office market. Singaporean buyers were also active in North America. The opportunity to capitalise on the sharper repricing of commercial property in Western economies was a key factor.

Moreover, the investment strategies of the likes of GIC and Mapletree Investments, which is part of Singapore’s Temasek Holdings, are based on high-conviction themes and trends in the global economy, particularly in the logistics and living sectors. “They’re quite thematic and programmatic,” Young said.

While there are concerns about Asian commercial real estate – particularly the uncertainty over interest rates and the negligible repricing across the region, with the exception of Australia and South Korea – the increasing maturity and sophistication of the region’s investment markets are underpinning confidence. Asia’s commercial property capital markets have come of age.

Nicholas Spiro is a partner at Lauressa Advisory