David Green-Morgan, Managing Director of Real Capital Analytics in Asia Pacific speaks to The Yield about APAC’s real estate hotspots.
Hi David, thank you for taking time to speak to the Yield. Could you tell us about Real Capital Analytics (RCA)?
RCA provides capital markets transactions for the commercial real estate industry all around the world with over 170 markets covered. And we deliver this to our clients through a web-based platform that is updated daily.
How are the Asian real estate markets looking right now?
Asia, over the first quarter has suffered more than other regions as we went into this crisis earlier than the US and Europe. Asia Pacific is 50% less busy than it was this time last year in terms of the number of transactions we are recording around the region. Obviously, it is a mixed and diverse region so not every country is dropping and recovering at the same speed. The major commercial investment locations are all suffering to a greater or lesser degree.
Are we seeing any bright spots? Who is handling the downturn better than others?
South Korea’s transactional volumes are up 12% compared to the first quarter last year. The main reason is that they never went into a full lock down of the economy, so the investment markets were able to continue at a normal rate of activity. Also, Korean investors found it more difficult to invest overseas so they focused more intently on their domestic market.
Why did they find it difficult to invest overseas?
There were more and more counties they were prohibited from visiting as the virus was expanding. The last few years most capital has been invested in the USA and Europe and they arrived at the crises point at the same time in terms of shutting down transport routes and going into lock down and quarantine.
And which asset classes are doing well in South Korea?
The two main ones are CBD offices and the industrial sector. Korea has come slightly late to the global logistics party that has been building steam over the past 5-10 years but there has certainly been more activity in this sector as occupiers have been looking for better quality buildings. This has fed into the pipeline, so there is more commercial investment activity.
Let’s take a look at China, how has the country responded to COVID?
China was hit hard in the first quarter but was still the second most active country behind Japan. Although transactional volumes were down, it is still an important investment market. We are starting to see signs of activity due to them getting on top of the virus successfully. The buildings currently being marketed should translate into investment activity in the second quarter.
Where in China are we seeing this activity?
The main tier 1 cities are seeing the activity as you expect during a crisis as investors focus on the bigger, more liquid markets. Hopefully if the recovery gathers more steam then we can see more deals in the smaller cities. Logistics and industrial are the big growth areas and there is a very large development pipeline over the next few months. This is where we will see investment activity if the economic backdrop continues to remain supportive.
Is the turnaround in China being reflected in Hong Kong?
Hong Kong is not really following the curve. Hong Kong is remaining in the doldrums due to the double whammy of protestors and COVID, perhaps triple whammy of more demonstrations, which has hurt investor confidence.
However, Ping An has bought a large piece of land over the high-speed rail complex in West Kowloon. This has given a bit of hope as Chinese investors been absent over the past year or so. Hong Kong is still facing many headwinds due to the political situation and virus. Until the political situation has been resolved then we will struggle to see activity returning to 2017/ 2018 levels when it was the regions most traded market.
We have spoken about regions, what about asset classes… where are we seeing good news?
Logistics. All the big providers globally have more-or-less maintained their earnings guidance for the year. This is encouraging as this sector is heavily involved in supermarkets and online distribution. This is certainly a bright spot in the overall market at the moment. It remains to be seen, however, how sustainable this is… If we do go into a longer period of lower economic growth all parts of the economy begin to suffer.
What should investors be doing right now?
I think that unlike the previous downturn, most real estate investors are very well capitalised and debt markets continue to function normally. It is now all about investors positioning themselves to look for opportunities wherever they may come. It is not immediately obvious where these opportunities will emerge, or which companies are able to navigate them best. Retail and hospitality are likely to offer the most attractive opportunities from a pricing perspective.
It is important to keep an eye on the government policies in different countries. Hong Kong is further ahead and in a better place than Singapore, for example, so you expect the economy to recover quicker there. There has also been differing levels of government intervention depending on the country. Some of it specifically targeted to real estate while some are more generally targeted at getting the economies going. It is worth keeping an eye on the policy agenda to see how and where restrictions will be unwound first or kept going the longest.