What has COVID’s impact been on South East Asian investors outbound real estate strategies?
Both before and during the pandemic, South East Asian investment continues to be at the forefront of outbound global real estate investment – particularly into the US, UK, Europe and Australia. This is especially true for the dominant regional capital sources of Singapore and Malaysia. In 2019, we saw US$15 billion capital deployed from Singapore into overseas markets – one third of all Asian cross-border capital into real estate.
I would say from CBRE’s many client discussions over the past few months, strategies to deploy capital outside of Asia remain very much in place. These cross-border strategies are perhaps being delayed in the short term and the investors’ focus has been on existing asset management and shoring up domestic assets, but we anticipate strong global activity and recovery in H2 2020 and beyond.
Inevitably, Covid-19 has ensured a slowdown in outbound investment volumes, but this is also due to limited product being available in the traditional markets, which typically attract capital from the region. Clearly some of the worldwide measures such as travel restrictions, have created additional barriers for overseas investors in being able to undertake inspections of assets and physical due diligence. In some markets, there have been questions around valuations and ‘market pricing’. And in other countries, we have seen a currency impact due to coronavirus. These are just some of the obstacles which have complicated cross-border real estate transactions. However, stability is coming back into many markets, border movements are relaxing and offices are reopening. This is all positive for cross border real estate transactions.
What is absolutely clear though, is that there are strong desires in our region to continue deploying capital in overseas market and to ensure diversification across sectors, asset classes, currencies and geographies. These include institutional, government-linked, listed, private equity and private capital.
How have investor priorities changed?
Capital from South East Asia has been dominant in many markets across the US, Europe (particularly the UK, Ireland, France and Germany) and Australia for almost a decade in varying forms. Arguably, it is already well diversified and different capital sources are at different stages of diversification and investment strategies.
Priorities are therefore different for each investor. For new capital, some of which has been compelled to diversify faster due to Covid-19, the London office market continues to be a dominant market for first time investors, due to its global appeal, transparency and liquidity. Other areas such as the weaker Sterling (post Brexit), and strong rule of law also are attractive in addition to market dynamics (low supply and high demand in both London leasing and investment markets). The proximity of Australia also continues to lure investors, particularly in the office investment markets of Sydney and Melbourne.
More established institutional investors are diversifying into new real estate asset classes and geographies. With the UK and Australia having been traditional investment markets, we see far more capital from South East Asia being deployed into Continental Europe and the US.
This has been true of Mapletree, a material investor in the US since 2015 in the logistics, corporate lodging and serviced apartment sector. Likewise, eighteen months ago, Capitaland acquired US$835 million of multifamily housing assets across, Los Angeles, Denver, Portland and Seattle. Similarly, more recently we have seen a number of Malaysian state linked funds active across European logistics in Germany and the Netherlands whilst also taking advantage of Polish office, retail and logistics assets.
One theme we also see, particularly from Malaysia, is the increased deployment of significant capital into the indirect market, placing capital into funds across the US, Europe and Australia – particularly in the logistics space.
Are we beginning to see the recovery? Which countries are rebounding? What assets are likely to rebound first?
Speaking to my CBRE colleagues across the world, it is evident that speed of recovery is varying on numerous factors.
In EMEA, a two-speed market is already evident. For example, Germany is largely fully operational and has a strong domestic investment market with large amounts of equity looking to being deployed. We are therefore already seeing a healthy number of assets being marketed and deals agreed.
Comparatively, the UK has only in the past couple of weeks started to lift lock down restrictions and London is largely dependent on overseas capital. The office investment markets see on average US$16 billion transacted annually, of which 80-85% of the capital is from overseas investors. This creates challenges with many quarantine periods still in place. That being said, even in London, my CBRE colleagues are already back in the office and sales campaigns are gradually returning back to normal. Many institutional investors, not least from South East Asia, already have offices and personnel in the UK and Europe, and are therefore well positioned to undertake inspections and due diligence for new opportunities.
Some markets and asset classes will take time to stabilise, and as a high-level view, we continue to see strong demand and, in some cases, sharpening prices in the logistics and multifamily space. This is true, across the US, UK, Europe and Australia. At this point in time, they are viewed as defensive assets, which due to Covid-19, have accelerated demand from both occupiers and investors.
A look at alternatives – where should South East Asian investors be considering investing?
Many investors around the globe have been increasing their real estate allocations to the ‘alternative sectors’. Prior to Covid-19 we have seen a significant shift from SE Asian investors, who have started to invest in the global Student Housing markets. The UK, which benefits from one of the largest international student populations, has largely been the net recipient of this capital. Malaysia’s KWAP has deployed capital into Student assets in Birmingham and Edinburgh. Last year CBRE sold c. US$120 million of Student Assets to Mapletree on behalf of Unite, across two major university cities. Perhaps most advanced in this investment strategy is Singapore Press Holdings, who has deployed c. US$1 billion into UK and Germany student housing in the past 24 months, operating some 7,500 beds across the two countries. We will continue to see capital deployed into this sector from many of the regional institutions, to the UK and also to Australia and the US. However, there will likely be some short term pause in this strategy due to Covid-19 disruptions.
As a result, we anticipate investors will also focus on resilient assets classes such as multifamily. Singaporean investors, Capitaland and Mapletree have been active in the US in this space, whilst CDL has deployed capital into the UK multifamily sector, as have Malaysian developers such as EcoWorld.
Similarly, there is a spike in demand from investors for Senior Living and Healthcare real estate assets – largely seen as recession proof and growth markets for the largely ageing Western populations.
Will we be seeing new players in the market?
Yes. At CBRE we are already seeing increased requirements from investors in South East Asia who are looking to make their first investments overseas. In this regard, the United Kingdom and Australia remain the preferred markets in the office and logistics sectors. This capital varies from private capital, family offices to large scale listed property companies.
Since the start of the pandemic, many commercial real estate investors and developers are looking to diversify and take advantage of opportunities in developed markets. Even before Covid-19, outside of Singapore and Malaysia, we were seeing an increased desire from other regional investors to enter developed markets. In the coming months, we will start to see more Thai, Indonesian, Filipino and Cambodian capital being exported.
The challenge for new outbound investors will be the relatively strong competition for the core assets they will seek, particularly as they compete with global institutional investors, pension and sovereign wealth funds, who are continuing to increase their AUM allocations in real estate.