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Peter Lee

Reassessing opportunities and risks in the Asian real estate market

​Peter Lee (Fund Manager of Henderson Asia-Pacific Indrect Property Fund) assesses the trends and risks in the Asian real estate market. He provides an insight into how rising liquidity, a hunt for yield, but continued risk aversion has translated into more cross-border transactions in the commercial real estate sector among core APAC markets, namely Australia, Japan, HK, Singapore and South Korea.

​Investors and the general public alike are fixated on monetary policies taking place on both sides of the Pacific; the open-ended QE3 in the U.S. and the 2% inflation target oriented action in Japan. Rising liquidity, a hunt for yield, but continued risk aversion has translated into more cross-border transactions in the commercial real estate sector among core APAC markets, namely Australia, Japan, HK, Singapore and South Korea. These markets are characterised by high transparency and sizable institutional grade investible stocks.

In terms of cross border capital flows, institutional investors, particularly those from the developed Western markets, are facing increasing challenges in effectively sourcing deals and putting capital to work in the region, due to various internal and external factors, including:

  • Higher return expectations due to risk premiums associated with investing in overseas markets with higher growth, but more perceived risks.
  • Institutionalised capital markets with ample liquidity from various local funding sources such as REITs, pensions and insurance companies, with lower costs of capital.
  • Lower performance due to increased premium paid for core yields; increased transparency means less information asymmetry and more transaction-based price discovery.

    To overcome these hurdles, a number of offshore investors have moved up the risk curve to pursue either niche strategies (i.e. alternatives, hotels) or development opportunities for undersupplied asset classes (i.e. affordable housing, logistics) in the developing economies of the region. Understandably, in most cases, investments into the abovementioned opportunities represent higher risk and reward potential.

    Risks can be broadly categorised as being either diversifiable or non-diversifiable, and investors have sought to mitigate the former through investment structuring in the form of joint ventures, co-investments or club funds. Market risks (non-diversifiable) can be considered as the drivers of risk premium, or quantification of the fear of the unknowns, in a real estate investment.

    In the context of Asian real estate, market risks can pertain but not be limited to:

    Political
  • Corruption / Bureaucracy
  • Unexpected changes in legal and tax regimes
  • Geo-political tensions;
  • Sector specific curbing policies

    Socio-economic
  • High level of private and public debt

    Environmental
  • Natural disasters
    Manmade pollutions

    In summary, given the dynamic nature of Asian property cycles, international investors who are keen to gain local exposure would do well to first assess the near-medium term macro trends of specific markets/sectors, in order to identify tactical (up to three years) and/or strategic investment (between three to seven years) strategies, and apply appropriate risk premiums to capture a realistic risk-adjusted returns.