On the Level

Imagine an elevator in a crowded shopping mall.

Chinese investors staying in the lift, thinking more carefully than ever about their next purchase, and going in for refunds. Koreans and Singaporeans shopping in the spaces once occupied by Chinese investors, with a growing footprint by Malaysians and Thais. Japanese investors getting off at more floors.

This sets the scene for Asian outbound spending in the coming year, except these shoppers are asset-hunting investors. The below trends dissect the differing behaviours of various investor groups across Asia Pacific in 2019.

Chinese investors evolve into net sellers while seeking new investment avenues

In 2018, the reduction of Asia outbound investment was characterized by a pullback by Chinese investors. The purchase appetite remains, but the strategies of investors from China are now fully within the rebalancing phase. As a result, 2018 will be remembered as the year when Chinese investors shifted from net buyers to net sellers.

The disposals from Chinese investors were driven by two forces – a need to strengthen balance sheets and, separately, a desire to recycle capital for future investments.

This two-pronged approach will likely continue. Further into 2019, we expect that there will be additional disposals by Chinese investors, again driven by a spirit of rebalancing and capital recycling. On the other hand, investors with recycled capital will look to inject these funds offshore. More recently, we observed select Chinese investors shift tactics and start to use indirect ways to gain overseas real estate exposure through investing in real estate funds. The Chinese property investor has by no means retreated, but in our view, will be more strategic in their future allocations.

Japanese investors more active, yet not quite filling the China gap

Japanese investors are becoming more active in offshore investing. Japanese investors will be more willing to invest overseas in 2019, but under certain scenarios. For example, we think that Japanese investors will be more selective as the rise of hedging costs makes it more difficult for Japanese investors to compete for U.S. real estate deals. This backdrop leads us to believe that Japanese investors will start to look for opportunities in Europe, where the JPY-EUR differential mitigates currency hedging costs. There are notable transactions that support this idea. Last year, we saw Sumitomo Mitsui Trust Bank acquire an office building in London, the first investment by this firm into UK real estate and representative of the type of investor from Japan looking offshore.

Japanese Investors will explore different asset classes.

Japanese investors have experience with international markets and this confidence will be reflected in the diversity of their real estate investments. Beyond the realm of direct real estate investment, Japanese investors will venture into estate debt investment opportunities with more readiness than their regional peers. According to Preqin data, the AISIN Employees’ Pension Fund plan to further invest in real estate debt fund after they have committed into two private real estate funds in Q1 2018.

Korean and Singapore investors will become more visible

Korean and Singaporean investors sit on significant capital and mature domestic real estate markets. Given limited availability of stock in their markets, Korean and Singaporean capital has filled some of the gap as Chinese investors rebalanced.

With Asian capital still hungry for portfolio diversification, this trend is likely to perpetuate into 2019. But, it is worth remembering that they are fairly different in their strategies.

Singaporean investors have a more diverse sector focus. Last year, the top three asset types were logistics, office and multi-family. Some notable deals done by Singaporean investors in 2018 include Capitaland’s purchase of a multifamily portfolio in US in H2 2018, Fraser Properties’ acquisition of a logistics portfolio in Europe in H1 2018, and Ascendas Singbridge’s purchase of an office portfolio in US in H2 2018.

Korean investors, on the other hand, are mainly focused on the office sector, which they are familiar with and fits a certain risk profile. Geographically, they prefer the European market for its attractive yield spread against borrowing costs and enjoy more competitive currency hedging between KRW and EUR. For example, Hana Investment acquired an office building located in Frankfurt CBD with a borrowing cost of less than 2%.

Hello Thailand and Malaysia

Encouragingly, investors in Southeast Asia are exhibiting a heightened interest in portfolio diversification. This trend is amplified by investors from Thailand and Malaysia, who are becoming more active across the board. And, similar to Korean investors, they are keen to look for stabilized assets in Europe.

For Malaysia, the leading investor will be Employee Pension Fund (EPF) who turning more active in 2018.

For now, Thailand investors are mainly focused on hotel assets, but we  expect this story to transpire into something bigger in coming years.

By Leo Chung, Associate Director, Asia Pacific Research, CBRE.