Part One
FORECAST indicates that local asset markets continue to have an abundance of cheap domestic capital. Today marks the largest gathering of real-estate players in the industry as they together confront possible industry headwinds in 2019.
Manila continues to find it hard to attract international investment despite a healthy domestic market that has seen office rents and capital values continue to rise and vacancies fall based in particular on activity from the online gaming and BPO industries, according to the Emerging Trends in Real Estate Asia Pacific 2019, a real-estate forecast jointly published by the Urban Land Institute (ULI) and PwC.
Muted interest from foreign funds is due to a combination of factors ranging from internal political concerns, regulatory barriers to entry and, most recently, by the potential economic consequences of capital outflows caused by rising interest rates, both domestically and in the United States. Another fundamental issue that has long acted as an indirect barrier for foreign capital remains in place—local asset markets are overflowing with cheap domestic capital. Foreign players who demand risk-adjusted returns in the high teens are therefore priced out of the market by local banks able to offer debt at rates as low as 2.75 percent.
Looking at the Asia-Pacific region as a whole, ongoing competition among investors to place capital is continuing to shape how the sourcing of assets is approached. Value-add plays continue to be a focus, with owners looking to upgrade assets by providing more flexibility, better user experiences, and improvements that leverage design and technology functions. As a result, investors today say they are likely to be more site specific, working from the ground up rather than the top down.
Among the trends in the Asia-Pacific region that the report cites are:
Logistics facilities continue to be a go-to investment: The only sector where investor opinions were uniformly bullish, investment allocations to the sector have risen significantly in 2018.
Co-living as a template for future housing: As cities are becoming denser and housing costs rise, more developers are looking to co-living as a way to pack more people into smaller areas.
Capital flows remain strong: The ongoing buildup of liquidity across the Asia-Pacific region still leads to huge sums of money crossing borders, to be invested in foreign real-estate assets. Strong outflows in the region seem certain to continue, especially with new reserves from Japan likely to enter the mix in 2019.
“While Manila fails to attract the positive sentiment it held back in 2017, local developers are now increasingly open to working with foreign players in order to leverage operational expertise as well as their international connections,” said John Fitzgerald, chief executive, ULI Asia Pacific. “In addition, good opportunities are increasingly available for investors able to find reliable local partners and to think out of the box, in particular by targeting alternative or emerging sectors such as infrastructure, logistics and industrial parks.”
“The Manila real-estate market remains strong,” said Alex Cabrera, chairman and senior partner, PwC Philippines. “The fundamentals we have are solid—even if office rents and capital values have risen at unprecedented rates, vacancies remain low. Also, we will continue to see the interest from foreign players who are making contingency plans to maintain access to key markets like the United States, from alternative exporting bases like the Philippines.”
Santos Knight Frank, ULI Philippines’s presenting partner of the Manila report, shared similar sentiments. “With strong market fundamentals, Asia Pacific’s real-estate markets, particularly the Philippines, are set to even grow larger in 2019 after many years of expansion. The Emerging Trends in Real Estate Asia Pacific report is a must-read source of information to your plan real-estate strategy this year,” said Rick Santos, chairman and CEO of Santos Knight Frank.
The Emerging Trends report, which is being released at a series of events across Asia, 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 over 350 survey responses received from real-estate professionals, including investors, developers, property company representatives, lenders, brokers and consultants.
The top 5 markets for investment and development in 2019:
• Melbourne (first in investment, first in development)—Melbourne has jumped ahead of Sydney this year. It offers a constrained office supply pipeline, good yield spread over the cost of debt and sovereign bonds, a deep, liquid, core market and fair prospects for rental growth.
• Singapore (second in investment, eighth in development)—An improvement in Singapore’s office market has enabled the city to take the second spot in investment rankings, as it continues to rebound from cyclical lows.
• Sydney (third in investment, third in development)—Sydney remains near the top of the rankings for the same reasons as Melbourne. The city is a favorite of global investors due to relatively high returns and as a safe-haven play. Competition for assets has helped sustain pricing, while low vacancies and growing demand for space suggest rents will continue to rise.
• Tokyo (fourth in investment, fourth in development)—Tokyo’s move to the fourth spot is somewhat surprising after last year’s drop, but probably reflects what has always made it a favorite for institutional buyers: cheap finance, attractive leverage, a good spread over interest rates and a large stock of investment-grade assets.
• Osaka (fifth in investment, sixth in development)—The lack of reasonably priced core assets in Tokyo continues to push investors into regional Japan, where local economies are now increasingly mature and stable. With supply tight in both residential and office sectors, the city is now probably the top market outside the capital.
Leading buy/hold/sell ratings for the various asset classes are as follows:
- Office—buy Ho Chi Minh City and Tokyo, sell Taipei and Auckland.
- Residential—buy Ho Chi Minh City and Bangalore, sell Kuala Lumpur and Auckland.
- Retail—buy Ho Chi Min City and Mumbai, sell Taipei and Kuala Lumpur.
- Industrial/distribution—buy Bangalore and Mumbai, sell Taipei and Kuala Lumpur.
- Hotels—buy Tokyo and Ho Chi Minh City, sell Taipei and Beijing.
For a full copy of the report, you may download at https://asia.uli.org/wp-content/uploads/sites/126/ULI-Documents/ULI-Emerging-Trends-Real-Estate-Asia-Pacific-2019_Final_22-Nov_low-1.pdf.